Inheritance Tax (IHT) can be a complicated area and there are a number of exemptions or reliefs that could apply on a person’s death. In this week’s article we will consider Quick Succession Relief and when this will and won’t apply on a person’s death.
What is Quick Succession Relief?
Quick Succession Relief (QSR) is a relief IHT under S141 Inheritance Tax Act 1984 that aims to reduce the IHT burden on an estate that includes assets which have been a transfer to the deceased in the previous 5 years before their death and the earlier transfer was also taxable for IHT.
QSR relief applies on the deceased’s death where:
- there was an earlier chargeable transfer,
- the chargeable transfer was within five years of the deceased’s death,
- IHT was (or becomes) chargeable, and
- the chargeable transfer increases the deceased’s estate.
The earlier chargeable transfer is usually a transfer made on death, but may be a failed potentially exempt transfer, an immediately chargeable lifetime transfer or a distribution from a relevant property trust.
Where QSR applies, the tax chargeable on death is reduced by the earlier tax paid, or a percentage of the earlier taxed paid depending on how many years have passed. The percentage is:
- 100% if the period between the transfer and the death is one year or less;
- 80% if it is between one and two years;
- 60% if it is between two and three years;
- 40% if it is between three and four years; and
- 20% if it is between four and five years.
QSR applies to the IHT due, rather than the value of the taxable estate. In the event that QSR is more than the IHT due on the estate, the IHT due will be reduced to zero.
When does Quick Succession Relief not apply?
QSR does not apply if:
- the transfer to the deceased was exempt
- the transfer to the deceased was chargeable but no IHT was paid as it was below the IHT thresholds
- the transfer to the deceased was made more than five years before the deceased’s death
- no IHT is payable on the deceased’s death
If QSR is available but is not used as the estate is left to a surviving spouse or civil partner, the unused QSR is not transferable.
How to calculate Quick Succession Relief?
The calculation for QSR is as follows.
- The amount of increase in the deceased’s estate is divided by the value of the earlier chargeable transfer
- This amount is then multiplied by the tax due on the earlier chargeable transfer
- This amount is then multiplied by the appropriate percentage
Jim dies in November 2020. His estate is worth £700,000. Jim inherited his mother’s estate after her death in August 2018. Her estate was £450,000 and IHT of £50,000 was due on his mother’s death. Jim also inherited on his wife’s death in April 2017 when she divided her estate equally between Jim and her children. IHT of £20,000 was due on his wife’s death.
Jim’s estate of £700,000 passes to his friend Sally. IHT is due on his death and as he inherited from transfers within the past 5 years QSR relief can be considered. QSR relief will be due on the inheritance from his mother under the 60% relief but not from his wife as the transfer to Jim was exempt from IHT.
QSR available on his death would be calculated as follows. All decimals are rounded to two decimal points:
The amount of increase in the deceased’s estate by the previous transfer: £450,000 – £50,000 = £400,000
Divided by earlier chargeable transfer (£450,000) = 0.89
Multiplied by tax due on earlier transfer (£50,000) = £44,444.44
Multiplied by 60% = £26,666.67.
His IHT bill would be calculated as follows:
£700,000 – £325,000 (nil rate band) = £375,000
Multiplied by 40% = £150,000
Minus the QSR (£26,666.67) = £123,333.33