IHTM04464 | Estate Duty surviving spouse exemption: examples for competency to dispose

In each example, property has been settled by the X settlement on the husband (Henry) for life, who predeceases his wife (Wendy).

Example 1

Remainder to Wendy absolutely, who, by the Y settlement, settles her reversionary interest on herself for life, with remainder to Barry. Duty is paid on Henry’s subsequent death on the ‘settled property’, but there is no exemption on Wendy’s death because she was competent to dispose (IHTM04457) before she executed the Y settlement.

Example 2

Remainder as Henry by deed or will appoint, and, in default of appointment, to Wendy absolutely. Wendy settles her vested but defeasible reversionary interest on herself for life, with remainder to Barry.

Henry died without having appointed, and duty is paid on his death. Even though Wendy was entitled only to a defeasible reversionary interest during Henry’s lifetime, it was held, in Att Gen v Hay [1899] 2 QB 245, that she was competent to dispose. However, this decision is difficult to reconcile with the Coutts case (see IHTM04456) and any situation in which you are considering denying exemption on the authority of Hay should be referred to Technical.

Example 3

Remainder to Barry absolutely, who, by the Y settlement, settles his reversionary interest on Wendy for life, with remainder to Charlie. Duty was paid on the death of Henry, and exemption is available on Wendy’s death.

Example 4

Remainder to Wendy absolutely. Henry and Wendy execute a deed bringing the X settlement to an end and resettling the property on Henry for life, remainder to Wendy for life, remainder to Barry. Exemption applies on Wendy’s death. She should not be treated as competent to dispose of the settled property on which duty was paid when Henry’s life interest came to an end.

Example 5

Remainder to Wendy for life, with remainder to Barry absolutely. After Henry’s death (on which duty is paid), Wendy and Barry resettle the fund on Wendy for life, remainder to Barry for life, remainder to Charlie. You should allow exemption on Wendy’s death, despite the resettlement, treating the fund on Wendy’s death as the same ‘settled property’ that bore duty on Henry’s death.

Example 6

Remainder to Barry absolutely. Duty was paid on Henry’s death, and at a later date Barry settled the property on Wendy for life, with remainder to Charlie. The settled property on Wendy’s death cannot be equated with the settled property that bore duty on Henry’s death, so no exemption is due.

Example 7

Remainder to Wendy for life, remainder equally to Barry and Charlie. After Henry’s death, on which duty was paid, Barry died bequeathing his reversionary interest to Wendy absolutely.

If, on the principle of Fry v IRC [1959] Ch 86, the settlement has come to an end so far as the half share derived from Barry is concerned, the exemption does not apply in respect thereof on Wendy’s death. But if, on the other hand, that half share is still regarded as comprised in the settlement at Wendy’s death because, for example, there has been no assent in Wendy’s favour - see Rivington v IRC [1964] Ch 149) - Wendy should be regarded as not competent to dispose, and exemption will be available on her death.

Cases involving decisions as to whether the life interest has merged with the reversion can cause difficulty. Fortunately they do not arise very often, and if you encounter one about which you are in any doubt, you can ask Technical for advice at an early stage.