Why Commorientes Can Affect UK Inheritance Tax

Sudden death!

Jon Golding ATT TEP, UK Tax and Trusts advisor with PI Global, explains why commorientes can affect UK Inheritance Tax (IHT) because "an important distinction arises in these cases regarding husband, wife and civil partner transfers in mitigating IHT"...
Where two people (e.g. husband and wife or civil partners) die in, say, a plane crash in circumstances such that it is uncertain which of them has died first then the rule is that for all purposes affecting title to property the younger is deemed to have survived the older person. This only applies where there is doubt as to survivorship where, for instance, there has been a disaster. However, if medical evidence suggests one of them survived the other if only by a few minutes then the rule does not apply.

 

 The survivorship clause

Section 184 of the Law of Property Act 1925 provides for the younger to have survived the elder in cases of disaster where it is not known which of them died first. Section 184 may be overridden where a clause is inserted in the will which states ‘provided that […] survives me for a period of twenty-eight days’ so that the normal distribution is in accordance with a testator’s wishes. The twenty-eight day clause insertion in a will under section 1 of the Law Reform (Succession) Act 1995 results in each estate passing as though the other had predeceased and for IHT purposes this will mean that, for instance, in partnerships (couples who are not married) each party may in such circumstances wish their estate to go to their own family members so utilising their relevant nil rate bands of £325,000. Jon Golding says “… in drawing up a will one should consider if the survivorship clause will have an unintended result in terms of UK tax and also the deceased’s wishes.”

 

The exception

In the case of spouses or civil partners who die in commorientes circumstances then the situation is complicated further by the IHT inter-spouse/civil partner exemption under IHTA 1984, s 18; as there is an exempt transfer on the death under section 18(1) then the transfer to the younger spouse or civil partner is not a chargeable transfer. However, the younger of the spouses/civil partners is deemed to have inherited the elder spouse’s/civil partner’s estate under the Law of Property Act 1925, s 184 but for the purposes of IHT under IHTA 1984, s 4(2) eliminates mutual gifts between individuals in such circumstances and there is no transfer of value to the younger spouse/civil partner on which inheritance tax can be charged. There is a view therefore that the elder’s estate of the married couple escapes inheritance tax completely and therefore a survivorship condition, which is normally desirable, is deliberately excluded in the event of the spouses/civil partners dying simultaneously.
In the case of civil partnerships this may not be desirable for the reasons as noted above but in a case where a married couple’s children benefit from their parents’ estates then depending on the size of the elder parent’s estate there could be a substantial saving in IHT at 40%. This view is confirmed by HM Revenue & Customs IHT manual at IHTM12197 which supports the view above that the elder spouse’s estate is not subject to IHT at all! See example below which applies to English domicile law (Scotland and N Ireland are different).