If an estate includes money or other assets recently inherited from another, can you reduce or avoid a double inheritance tax charge?
Inherited wealth
It’s fairly typical that when someone with children dies they leave the bulk of their estate to them. However, for those with no children it’s quite usual for the deceased to pass their wealth to a sibling or other relative nearer to their age. On the face of it this might present an inheritance tax (IHT) problem.
Example. Edward was a lifelong bachelor. In May 2022 he died aged 75. He left all his £700,000 estate to his sister Vivian. The estate pays IHT of £150,000 and Vivian puts the remainder into various bank accounts. In March 2023 Vivian dies leaving an estate worth £1 million. More or less £550,000 of this was Edward’s and has already been subjected to IHT. If it were taxed again it would in effect mean the £700,000 in Edward’s estate will have lost £370,000 to HMRC ((£700,000 – £325,000 nil rate band) x 40% IHT = £150,000 + (£550,000 x 40% = £220,000)).
Quick succession relief
Even by HMRC’s standards the double hit of tax on Edward’s estate is a little stiff. The good news is that a special IHT relief, known as quick succession relief (QSR), can moderate it.
A formula is used to reduce the IHT payable in the second estate to the extent that it has already been subjected to IHT. The longer the gap between the first death and the second the less QSR is allowed.
Tip. QSR can apply where the deaths occur within five years of each other.
Tip. QSR not only applies to gifts received through a will or intestacy but also to those bequeathed by someone who was alive but who dies before or after the recipient does.
Any asset will do
QSR doesn’t apply specifically to the assets passed from one estate to another but to the value of the assets transferred. Therefore, if Edward’s estate consisted of an investment portfolio worth £600,000 and cash of £100,000 (before IHT), Vivian could use all or part of this to, say, buy a second home. This would have no effect on the QSR.
Double QSR?
Where an estate includes transfers (gifts) from two successive deaths in a five-year period, special rules apply to ensure that a greater amount of QSR is given on the final estate.
For example, Tom dies leaving money to his brother Dick, who dies and leaves his estate (which includes the transfer from Tom) to Harry. The QSR on the first transfer from Tom to Dick is calculated as described above, but the relief for the following transfer from Dick to Harry is adjusted to take account of the effects of the first transfer and any QSR already given.
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.