Laws of Property and IHT
The rule regarding commorientes is concerned with determining survivorship where two or more people have died. The legislation is in the Law of Property Act 1925, s 184. It broadly states that where two or more people have died and it is unclear if one of them has survived the other, the law presumes that they died in the order of seniority, i.e. the younger person is deemed to have survived the elder (nb this section only applies to deaths in England and Wales). For IHT purposes, the potential effect of the commorientes rule could be double (or multiple) IHT charges on such deaths, albeit subject to quick succession relief for chargeable transfers (IHTA 1984, s 141). The IHT legislation therefore includes the following provision (IHTA 1984, s 4(2)):
“…where it cannot be known which of two or more persons who have died survived the other or others they shall be assumed to have died at the same instant.”
The interaction of general law and tax law can have interesting results for husbands and wives with wills leaving their estates to each other. For IHT purposes, if it cannot be known which of the two survived the other, they are assumed to have died at the same instant. Therefore the older spouse’s estate does not increase the estate of the younger spouse (IHTA 1984, ss 4(2), 54(4)). The effect of these provisions and the commorientes rule in LPA 1925, s 184 can result in the estate of the elder spouse or civil partner escaping IHT on both deaths. HMRC provide an example in the Inheritance Tax Manual: http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM12197.htm
In addition, IHTA 1984, s 92 (‘Survivorship clauses’) addresses the potential problem of double (or multiple) IHT charges on successive deaths. It applies to deaths which are not simultaneous but follow within a short time period. This rule broadly provides that if (under the terms of a will or otherwise) property is held for a person on condition that he survives another for a specified period of not more than 6 months, and another beneficiary becomes entitled to the property because the original beneficiary did not satisfy the survivorship condition, the IHT position is the same as if that other beneficiary had taken the property from the outset.
Many wills for married couples or civil partnerships contain survivorship clauses, which are typically for 30 days or 3 months. There is no hard and fast rule to say whether survivorship clauses should be included in wills. However, as a general rule the facility to transfer IHT nil rate bands between spouses means that survivorship clauses are perhaps less important than before, particularly if the husband and wife each have assets that would utilise their nil rate bands.
The introduction of the transferable nil rate band in Finance Act 2008 has potentially improved the IHT position even further in commorientes circumstances. HMRC have confirmed in the IHT manual that because the nil rate band of the elder spouse is effectively unused, the younger spouse’s estate can potentially benefit from it, assuming of course that it hasn’t been used up by lifetime transfers.
John and Susan are married and live in Cheshire. John is 10 years Susan’s elder. Their estates are worth £600,000 each. They have made no lifetime gifts. They die simultaneously in an accident on 30 September 2009. Their Wills do not include a survivorship clause, and they leave their assets to each other on the first death, and otherwise to their adult children.
Applying the rule in the Law of Property Act 1925, s 184, John is deemed to have died first, so his estate would pass to Susan. However, for IHT purposes, the rule in IHTA 1984, s 4(2) means that John and Susan are assumed to have died in the same instant. HMRC’s approach is to treat John’s estate as being subject to the spouse exemption, but Susan’s estate is treated as excluding John’s estate. The result is that John’s estate of £600,000 escapes IHT on both deaths, and passes to their children. Only Susan’s estate of £600,000 is subject to IHT. However, in addition to Susan’s own nil rate band of £325,000 being available, John’s unused nil rate band of £325,000 is also available upon the making of a claim by Susan’s Personal Representatives. The overall result is therefore that no IHT is payable on John or Susan’s estates, and that assets worth £1.2 million in total pass to their adult children.
In cases where there is a survivorship clause in the wills of husband and wife (or civil partners), it may be worth considering the inclusion of a condition excluding the operation of the survivorship clause in ‘commorientes’ circumstances (i.e. on simultaneous deaths) in the will of the elder spouse or civil partner. This is a point to consider when, for example, carrying out an IHT review for clients who are either married or civil partners.
The above article is reproduced from ‘Practice Update’ (July/August 2009), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past copies, click here.