Reducing a double IHT hit

This post looks at what happens  if a person who inherits then dies soon afterwards, and two alternatives for planning to avoid or reduce a double inheritance tax (IHT) hit.

An example: Dave dies with an estate of £800,000, leaving everything to his sister, Edith. The nil rate band for Dave is the normal £325,000, so IHT of £190,000 would be paid and Edith would inherit  £690,000. Edith then dies just over 2 years later, leaving an estate of £900,000, most of which had been inherited from Bill. She leaves everything to her daughter Frances.

The IHT due on Edith’s estate will be reduced by Successive Charges relief. This reduces the IHT due by a percentage depending on how long it has been since the previous death:

Years between
deaths
% reduction
1 year or less 100
1 to 2 years 80
2 to 3 years 60
3 to 4 years 40
4 to 5 years 20
Over 5 years 0

 

So there will be a 60% reduction in the IHT due on Edith’s estate, which is then calculated as follows:

Edith’s Estate £900,000
less nil rate band -325,000
total subject to IHT 575,000
IHT @ 40% 230,000
less successive charges relief @60%  -138,000
actual IHT charged £92,000

 

That is a pretty significant saving. However if Edith doesn’t need to inherit anything from Dave, an alternative approach would be for him to leave everything (or a significant amount) directly to his niece Frances. In general it is a good idea to minimise IHT by leaving money down the generations.

If Dave doesn’t do this for whatever reason, then after he dies Edith could think about making a Deed of Variation so that the money goes directly to her daughter.

You might be wondering why solicitors suggest that you put “if he survives me by more than 30 days” clauses into your will, because the 100% successive charges relief would prevent any additional IHT being charged. This sort of clause isn’t primarily intended to reduce IHT, it’s intended so that your estate goes to who you would choose if you and your partner, say, both die in the same road accident.

add your comment

*