No one likes thinking about death. The prospect of Inheritance Tax (IHT) possibly being payable on your estate may not help either! However, in certain circumstances an individual’s estate can escape IHT completely on death, no matter how large the amounts involved.
How can this be?
The answer lies in the way that the general law (in England and Wales) interacts with tax law. According to general law, if two or more people die in circumstances where it is unknown if one has survived the other (e.g. in an accident), the younger person is deemed to have survived the elder.
This is potentially bad news for IHT purposes, as it could result in multiple IHT liabilities. Fortunately, tax law provides that if it is unknown which of two (or more) persons who have died survived each other, they are deemed to have died at the same time.
In the case of husbands and wives (or civil partners), it is quite common for them to provide for each other in wills by leaving their estates to the other spouse on the first death, or otherwise to (for example) their children. If they unfortunately die together at the same time, the effect of the above rules can be that the elder spouse’s estate escapes IHT completely.
Jack (age 50) and Jill (age 46) are married with two adult children. They have made no lifetime gifts. Their wills leave their estates to each other on the first death, or otherwise to their adult children. They each have estates worth £600,000. Sadly, they die together in an accident on 1 September 2009. What is the IHT position?
Under general law, Jack is deemed to die first. However, for IHT purposes they are deemed to have died in the same instant. Jill’s IHT estate is ascertained immediately before death, so she cannot be deemed to hold Jacks estate. The result is that Jack’s estate of £600,000 escapes IHT on both deaths, and passes to their children.
Jacks IHT ‘nil rate band’ (£325,000 for 2009-10) is unused, and can therefore be claimed by Jill’s estate. This increases her own nil rate band to £650,000.
Jill’s estate of £600,000 is covered by her enhanced nil rate band of £650,000.
The overall result is that no IHT is payable on Jack’s or Jill’s estates, and that assets worth £1.2million pass to their children.
Survivorship Clauses in Wills
Some wills include a ‘survivorship clause’ to cover situations where (say) husband and wife do not die together, but within a short time of each other. The IHT provisions state that if assets are left to each other on condition that one survives the other for a specified period of up to 6 months, and another beneficiary becomes entitled to the assets because this survivorship condition was not satisfied, the IHT position is the same as if the other beneficiary had taken the assets in the first place.
Going back to the example of Jack and Jill, had their wills included a survivorship clause, Jack’s estate would have passed to the children, and been subject to IHT (which would use up his nil rate band).
However, it may be possible to avoid this problem, such as by ensuring that the survivorship clause in the elder spouse’s will does not apply if both spouses die simultaneously. Ask your professional adviser (if you have one) to check that your will is ‘IHT efficient’ based on your own particular circumstances. And start thinking about the unthinkable!