Inheritance tax (IHT) is, broadly speaking, payable at 40% on the value of a person’s assets at their death, after deducting various reliefs and the ‘nil rate band’ (currently £325,000). IHT of £110,000 (i.e. (£600,000 – £325,000) x 40%) should therefore have been payable on the first death, leaving a net inheritance of £490,000 passing to the son. In turn, £190,000 (i.e. (£800,000 – £325,000) x 40%) would then be payable on the second death, leaving a net inheritance for the nephew of £610,000.
Where IHT is payable on the same amount multiple times in a short time span, such as here where part of the £600,000 initial inheritance has been taxed twice in 25 months, a relief known as ‘Quick Succession Relief’ (QSR) is potentially available. In order for QSR to apply, the conditions at IHTA 1984 s.141 must be met. In short:
• There must have been a transfer into the deceased’s estate.
• The transfer must have occurred in the five years to death.
• IHT must have been payable at some point on that transfer.
The relief is given as a reduction of the tax due on the net increase in the estate from the earlier transfer and, as explained by HMRC at IHTM22051, can be expressed as the formula (A ÷ D) × B × C, where:
A = Amount of increase of deceased’s estate.
B = Tax on earlier chargeable transfer.
C = Appropriate percentage.
D = Value of earlier chargeable transfer.
The appropriate percentage ranges from 100% (where the second death is within one year) to 20% (where the second death is between four and five years after the first), as set out in s.141(3). Therefore:
As mentioned above, the father’s estate paid £110,000 in IHT. As the son then died between two and three years later, the relief would be (£490,000 / £600,000) x £110,000 x 60% = £53,900. This would reduce the IHT payable on the second death from £190,000 to £136,100.
Even if a claim was not included on the IHT400, HMRC may have already given relief and so it is worth double checking any correspondence received at the time. However assuming QSR has not been given, you should complete form C4 and send this to HMRC to claim a refund of the overpaid IHT.
As a final point, QSR applies based on values transferred, not on specific assets. Had the father left a commercial building worth £600,000 to the son, QSR may still have been available, subject to the conditions above, even if the son had then sold the property. This is provided that the proceeds were then either fully retained or fully reinvested into a new asset (on which IHT is later payable), otherwise the QSR available is reduced accordingly.
Further guidance can be found in HMRC’s manuals at IHTM22000 from IHTM22041 onwards. The Croner-i Direct Tax Reporter guidance is at 627-400.
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