Mark McLaughlin looks at circumstances where an individual’s estate can escape inheritance tax completely on death.
Death and taxes are said to be two certainties in life. However, in some (albeit unfortunate!) circumstances, an individual’s estate can escape inheritance tax (IHT) on death.
Let’s pretend
A non-tax law in England and Wales (Presumption of survivorship, or the ‘commorientes rule’) on the simultaneous deaths of two people provides that where it is uncertain which person survived the other, those deaths are presumed to have occurred in seniority order (LPA 1925, s 184). Thus, the younger is deemed to have survived the elder.
By contrast, for IHT purposes, where it cannot be known which individual survived the other, they are assumed to have died at the same instant (IHTA 1984, s 4(2)). For example, if a married couple’s wills leave their estate to the surviving spouse on the first death, the elder spouse’s IHT estate does not increase the younger spouse’s estate.
HM Revenue and Customs’ (HMRC’s) view is seemingly that the interaction of the IHT and commorientes rules can result in the elder spouse’s estate escaping IHT on both deaths (see HMRC’s Inheritance Tax manual at IHTM12197) (NB different rules apply in Scotland and Northern Ireland).
Example: Tragic accident
Sam (age 60) and Janet (age 54) are married. Their estates are worth £500,000 each. In their wills, Sam and Janet leave their estates to each other on the first death. They tragically died simultaneously in a car accident.
Sam is deemed to have died first for commorientes purposes, so his estate passes to Janet. However, for IHT purposes, they are deemed to have died at the same instant. HMRC considers that on Sam’s death his estate passes to Janet and is covered by the IHT spouse exemption. On Janet’s death, the IHT ‘same instant’ rule excludes Sam’s death estate in the IHT computation on Janet’s death. Accordingly, Sam’s estate escapes IHT on both deaths.
Transferable nil rate band
The transferable nil rate band facility for spouses (and civil partners) can improve the IHT position further in commorientes circumstances. HMRC considers that where spouses with wills die at the same time, and it is impossible to establish who died first, it is presumed that the elder died first; and where the will results in unused nil rate band on the first spouse’s death (e.g., their estate is left to the surviving spouse), it is generally available for transfer to the surviving spouse’s estate. The IHT ‘same instant’ rule continues to operate on the younger spouse’s death to exclude the assets received from the elder spouse.
Consequently, the younger spouse’s estate could effectively benefit from a double IHT nil rate band, and the assets accruing to their estate from the elder spouse are excluded (see IHTM43040).
Survivorship clauses
A different scenario is where two or more people have died; not simultaneously, but within a short time of each other (IHTA 1984, s 92).
Broadly, where property is held for someone (A) on condition they survive another person (B) for not more than six months, and B becomes entitled to the property because it transpires that A did not satisfy the six-month survivorship condition, the IHT position is the same as if B was originally entitled.
Practical tip
Wills for married couples (or civil partnerships) often include survivorship clauses (e.g., stipulating a 90-day survivorship period). If so, consider including a condition in the elder spouse’s will, disapplying the survivorship clause upon simultaneous deaths.
