Mark McLaughlin points out that in certain circumstances the estates of a married couple or civil partnership can escape inheritance tax completely on death.
It is said that nothing is certain but death and taxes. However, there are exceptions in respect of inheritance tax (IHT) on death in certain circumstances.
The general law (in England and Wales) provides that where two or more people have died and it is unclear if one of them has survived the other, they are normally presumed (subject to any court order) to have died in the order of seniority, i.e. the younger is deemed to have survived the elder (LPA 1925, s 184). This is often referred to as the ‘commorientes’ rule.
For IHT purposes, without a relieving provision the potential effect of the commorientes rule could be double (or multiple) IHT charges on such deaths (albeit that ‘quick succession relief’ may be available for chargeable transfers). The IHT legislation therefore provides that where it cannot be known which of two or more persons who have died survived the other(s) they shall be assumed to have died at the same instant (IHTA 1984, ss 4(2), 54(4)).
The transferable IHT nil rate band can potentially improve the IHT position for married couples (or civil partners) in commorientes circumstances, if both spouse’s estates pass to each other under their wills. HMRC guidance in its Inheritance Tax manual confirms that because the nil rate band of the elder spouse is effectively unused, the younger spouse’s estate can potentially benefit from it, assuming that it has not been used up by lifetime transfers (IHTM43040).
The interaction of general law and tax law can have interesting results. The following is based on an example in HMRC’s Inheritance Tax manual (at IHTM12197).
Example: Tragic accident
John and Karen are married and live in Cheshire. John is five years Karen’s elder. Their estates are worth £600,000 each. They have made no lifetime gifts. They died simultaneously in a car accident in September 2016. Their wills do not include a survivorship clause (see below), and they leave their assets to each other on the first death, and otherwise to their adult children.
John is deemed to have died first (under LPA 1925, s 184), so his estate would pass to Karen. However, for IHT purposes, John and Karen are assumed to have died in the same instant. John’s estate is treated as being subject to the spouse IHT exemption on passing to Karen. However, Karen’s estate is treated as excluding John’s estate. John’s estate of £600,000 therefore escapes IHT on both deaths, and passes to the children.
Only Karen’s estate of £600,000 is subject to IHT. However, in addition to Karen's own nil rate band of £325,000, John’s unused nil rate band of £325,000 is also available. The overall result is therefore that no IHT is payable on John’s or Karen's estates, and that assets worth £1.2 million in total pass to their adult children.
Separate IHT provisions (see IHTA 1984, s 92) concerning survivorship clauses in wills, etc., address the different potential problem of double (or multiple) IHT charges on successive deaths. It applies to deaths which are not simultaneous, but follow within a short time period. This rule broadly provides that if (under the terms of a will or otherwise) property is held for a person on condition that (s)he survives another for a specified period of not more than six months, and another beneficiary becomes entitled to the property because the original beneficiary did not satisfy the survivorship condition, the IHT position is the same as if that other beneficiary had taken the property from the outset.
In cases where there is a survivorship clause in the wills of husband and wife (or civil partners) leaving assets to each other on the first death, it may be worth considering the inclusion of a condition excluding the operation of the survivorship clause in ‘commorientes’ circumstances (i.e. on simultaneous deaths) in the will of the elder spouse. This article has focused on simultaneous deaths in England and Wales: the law in Scotland and Northern Ireland is different. In all cases, expert professional advice is recommended.
This article was first printed in Tax Insider in November 2016.