Good inheritance tax planning can increase the amount of your estate left to your beneficiaries. However, many wills overlook the tax trouble that can occur if spouses die simultaneously. What vital clause should your will include to prevent this?
Are wills necessary?
While the general wisdom is that we should all have a will, the absence of one often won’t adversely affect how your estate is distributed (because for smaller estates the intestacy rules might tie in with your wishes) or result in a higher inheritance tax (IHT) bill. What’s more, where you have a will, the tax implications of even seemingly minor clauses need to be considered carefully.
Who died first?
In England and Wales the law says that where two people die, say a married couple, but it isn’t known who died first (for example where they are involved in a fatal accident), the eldest is treated as having died first. This is often referred to as the “commorientes rule”.
IHT rules differ
The commorientes rule doesn’t apply for IHT purposes. Instead, tax rules say that where the actual date and time of death of two persons can’t be determined they are assumed to have died at exactly the same time. Where there’s a will this can have a big impact on the amount of IHT payable.
Example 1. Bill is older than his wife Jean. Each of their estates are worth £500,000. Their wills include a typical clause for a couple which means the estate of the first to die passes to the survivor. Note that transfers between spouses are exempt from IHT. Bill dies in January 2021 and his estate is inherited by Jean. She dies two months later leaving a total estate of £1 million to her and Bill’s children. After deducting the nil rate band and that transferred from Bill’s estate (for simplicity we’ve assumed that the residence nil rate band doesn’t apply) which total £650,000, IHT is payable on £350,000, i.e. £140,000.
Example 2. The circumstances are the same as in example 1, except Bill and Jean die in an accident in January 2021 and it isn’t known who passed away first. Estate law says that Jean is treated as surviving Bill and so his estate therefore passes to her. This transfer is exempt from IHT. But tax rules say that for IHT purposes they are treated as dying simultaneously. This means Jean’s estate doesn’t include Bill’s when calculating IHT. Thus, Bill’s estate (£500,000) is exempt because it passed to Jean (his spouse), and Jean’s estate (£500,000) is covered by her nil rate band and that transferred from Bill. In other words, both estates escape IHT.
Survivorship clause
If, as is common, Bill and Jean’s wills include a survivorship clause, e.g. if the other spouse doesn’t survive the first spouse’s death by, say a month or more, the estate of the first to die goes to different beneficiaries, the tax loophole described in Example 2 wouldn’t apply. This is because on Bill’s death his estate would pass to his children and so the spouse exemption wouldn’t apply.
Tip. If your will includes a survivorship clause ask a solicitor to add a caveat that it won’t apply in the event you and your spouse’s death occur together meaning that IHT rules deem them simultaneous.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.