Chapter: 2 - Inheritance Tax Mitigation: The Basics

Estate Duty surviving spouse exemption

2.2.12

Where Estate Duty was paid (or would have been payable but for reliefs or the threshold) on the death before 13 November 1974 of the first spouse to die and the survivor has a life interest under the Will, no IHT is chargeable on the second death (IHTA 1984 Sch 6 para 2). However, the related property rules may affect the chargeable value of the free estate or other property taxed on death.

Note that there will also be no IHT implications arising from an inter vivos termination of the life interest (even if death follows within seven years), though in that event the CGT-free uplift on death would have been wasted.

A claim to the Estate Duty transitional relief failed in circumstances where the estate of the husband (who died in 1969) was left to the wife outright.  She vainly tried to argue that there was a legally enforceable secret trust under which on the wife’s death the property in question would be left to their two daughters.  The First-tier Tax Tribunal (Judith Powell) held that there was no evidence for that argument, nor indeed for the alternative assertion that the 1965 Wills made by the spouses were mutual Wills, so that on the husband’s death the widow held the relevant property on constructed trust for the daughters.

(Davies and another v RCC TC 106 9 June 2009)  [14 August 2009]

TAX TIP:  An ‘Estate Duty protected life interest’ should be kept in place until the death of the survivor.  The fund will be free from IHT and the acquisition cost of the assets will be market value, with the CGT-free uplift in value on death.