Following on from our article last week, we will now be examining the impacts of survivorship clauses on gifts between spouses and civil partners. Inclusion of these clauses for spouses can be unintended consequences when it comes to Inheritance Tax (IHT) and therefore their inclusion needs to be carefully considered during the will drafting process.
Reminder – What is a Survivorship Clause?
A survivorship clause is a provision in a will that stipulates a beneficiary must survive the testator by a specified period in order to inherit under the will. The most common period is 28 days, although this can be longer or shorter depending on the testator’s wishes. If the beneficiary does not survive the testator by the specified period, their gift will fail, and the will’s terms will determine who inherits instead.
Background – The Commorientes Rule
S184 Law of Property Act 1925 provides the “commorientes rule.” This rule applies where two or more people die in circumstances where it is uncertain who died first. In such cases, the law presumes the elder died first, unless there is evidence to show otherwise. For succession purposes therefore, two people cannot die simultaneously.
This is in contrast to IHT as S4 of the Inheritance Tax Act 1984 treats such deaths as occurring in the same instance if the order cannot be established. In addition, IHT is only charged on the estate owned immediately before the person’s death.
This mismatch between the succession and IHT rules can, in rare cases, lead to an IHT benefit as only a younger spouse’s estate will be taxed.
Example
Mr and Mrs Black are married, each owning £500,000 in their sole names. Their wills leave their estates to each other, and if the spouse does not survive, to both sets siblings. They die together in an accident, and it cannot be determined who died first. Mr Black is the elder. No survivorship clause is included.
- For succession purposes, Mr Black’s estate passes to Mrs Black. Mrs Black’s estate (including the inheritance from Mr Black) then passes to their siblings.
- For IHT purposes, Mr Black’s estate benefits from the spousal exemption. IHT is charged only on Mrs Black’s estate immediately before her death (£500,000 only), which also benefits from Mr Black’s unused nil-rate band (NRB).
- Result: No IHT payable.
If a survivorship clause was used however, this IHT benefit is lost entirely. Both estates pass directly to the siblings for both succession and IHT purposes. Each estate exceeds the NRB, resulting in £70,000 IHT per estate (a total of £140,000).
Should Survivorship Clauses Apply to Spouses?
If a survivorship clause is used for a spouse or civil partner, it is best practice to ensure that the clause is expressly negated where the order of death cannot be determined. This preserves the rare IHT benefits that may otherwise be lost.
If the survivorship period includes this wording, in most cases, such clauses are IHT-neutral if spouses die in quick succession, but there are exceptions
One spouse with assets above the NRB, one with assets below
Where one spouse’s estate exceeds the NRB and the other’s does not, allowing assets to pass via the survivor (even if only briefly) can be more IHT‑efficient than bypassing them because it preserves the spousal exemption on the first death and the survivor’s ability to claim the predeceased spouse’s unused NRB on the second death. A survivorship clause would block this ability and can lead to an increased IHT charge.
Example
Mr and Mrs White are married. Mr White has assets of £200,000 and Mrs White has £500,000. Their wills gift to each other with 28-day survivorship clause, and then to friends. Mrs White dies first, followed by Mr White 10 days later.
Mrs White’s estate will pass to her friends as Mr White fails to meet the survivorship period. Her estate is above the NRB and is liable to IHT as follows
- £500,000 – NRB = £175,000
- £175,000 x 40% = £70,000
No IHT is due on Mr White’s estate as it is below the NRB. This however means that Mr White’s unused NRB is wasted as he died after Mrs White.
If the wills had no survivorship clause, on Mrs White’s death her estate would pass to Mr White. No IHT is payable due to the spousal exemption and her unused NRB is transferable. On Mr White’s death, his estate is taxable but will have the benefit of two NRBs.
- £700,000 – 2xNRBs = £50,000
- £50,000 x 40% = £20,000
For married couples in this situation, it would therefore be best practice to not include a survivorship condition on the surviving spouse to ensure full benefit of the transferable NRB can be obtained.
Combined estates over the RNRB Taper
Where a married couple have a combined estate above the Residence Nil Rate Band (RNRB) taper threshold (currently £2 million) and wish to benefit each other outright (or on life interest trusts for each other), they may wish to consider a survivorship condition on the spouse’s entitlement. Where an estate is over the RNRB taper threshold, the benefit of RNRB is reduced by £1 for every £2 that the estate exceeds the threshold.
Benefiting the spouse could lead to bunching of assets and push the survivor’s estate over the taper threshold, leading to full or partial loss of the RNRB. A survivorship condition can, in quick‑succession scenarios, avoid bunching and keep each estate below the taper.
Example
Mr and Mrs Green each have assets of £1.5 million including the home. They make wills benefiting the survivor outright, and then to children. Mr Green dies first followed by Mrs Green 20 days later.
On Mr Green’s death, no IHT is payable due to the spousal exemption and unused NRB and RNRB is available to transfer. On Mrs Green’s death, her estate is £3 million which is considerably over RNRB taper threshold so no RNRB is available. Her estate is taxed as follows:
- £3 million – 2xNRBs = £2.35 million
- £2.35 million x 40% = £940,000
If the wills included a survivorship period of 28 days, this would lead to Mr Green’s estate passing to the children rather than to Mrs Green. Each estate remains below the taper threshold and therefore benefits from RNRB.
Each estate is taxed as follows:
- £1.5 million – NRB – RNRB = £1 million
- £1 million x 40% = £400,000
A survivorship clause here ensures RNRB is retained and leads to an IHT saving of £140,000.
Practical tip: Severance of joint tenancy in the property to tenants in common may be required here to obtain the most out of this planning, otherwise the home would pass to the survivor outside of the will and will not be subject to the survivorship period.
Conclusion
The inclusion of a survivorship clause on a gift to a spouse is not a one-size-fits-all decision. As illustrated, its impact on inheritance tax can vary widely. Careful planning and drafting is needed to ensure that potential IHT benefits are obtained, and any drawbacks avoided.
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