IHTM45050 | Reduced rate for gifts to charity: other issues: where the estate is entitled to Quick Succession Relief

FB12/Sch33/Para 7 inserts a new section 141A that deals with the application of quick succession relief (QSR) (IHTM22041) where an estate also qualifies for the reduced rate of tax.

Where there is only one estate component, QSR can be applied in the normal way as it is reducing the tax chargeable on the value transferred on death. And it may also be applied in the normal way where there is more than one component of the estate, but all the components are entitled to the reduced rate of tax as the apportionment of the relief by reference to the capital of the estate will produce the same result as that contained in IHTA84/S141A.

But, where the estate contains more than one component and at least one of the components does not qualify for the reduced rate, you must apportion the QSR as set out in IHTA84/S141A.

The reason for this is that QSR applies to reduce the tax chargeable on the value transferred on death, in other words, the tax chargeable on the aggregate estate. Where the reduced rate applies, the total tax chargeable will be lower than that at full rate. Normally QSR is apportioned by reference to the capital value of the components. If this went unchanged it would allow the qualifying component to have the benefit of the QSR it would be entitled to if it were paying tax at the full rate, when it is only paying tax at the reduced rate.

IHTA84/S141A(3) stipulates that for each qualifying component, the tax attributable to that component is to be reduced by the ‘appropriate proportion’ of the QSR that is due.

IHTA84/S141(4) specifies that the appropriate proportion is the proportion that the tax attributable to the qualifying component bears to the tax chargeable on death as a whole. In other words, where an estate qualifies for both QSR and the reduced rate, the QSR attributable to each component must be apportioned by reference to the tax due on each component and not its capital value. The result is that the QSR allowed against the qualifying component reflects the fact that it is bearing a slightly smaller portion of the overall tax liability.

COMPASS will be amended so that QSR will be apportioned by reference to the tax payable by each component. Where the reduced rate does not apply, the end result will be the same; but where the reduced rate does apply, the relief will be correctly apportioned. You should continue to enter QSR in the normal way.

Example

Richard died on 14 November 2012 leaving an estate valued at £300,000 from which a legacy of £50,000 was due to charity. His estate included joint property passing by survivorship valued at £500,000 and a life interest valued at £1,250,000. His estate was entitled to QSR of £80,000. The tax calculation is as follows

The general component qualifies for the reduced rate as the amount donated to charity exceeds £24,583.

Tax at 36% on the general component is £70,500. Tax at 40% on the survivorship and settled property components is £156,667 and £235,000 respectively. The total tax is £462,167.

The normal calculation for QSR effectively apportions the £80,000 by reference to the capital value of the components. This would result in the following figures to reduce the tax:

General component: £250,000 ÷ £1,500,000 x £80,000 = £13,333

Survivorship component: £500,000 ÷ £1,500,000 x £80,000 = £26,667

Settled component: £750,000 ÷ £1,500,000 x £80,000 = £40,000

The tax payable by each component would be reduced as follows:

General component: £70,500 - £13,333 (QSR) = £57,167

Survivorship component: £156,667 - £26,667 (QSR) = £130,000

Settled component: £235,000 - £40,000 (QSR) = £195,000

But as mentioned above, this allocates QSR between the components on the assumption that each component is bearing an equal proportion of the tax – when in fact the general component is benefiting from the reduced rate. The effect of IHTA84/S141A(3) is that the QSR of £80,000 must be apportioned by reference to tax payable by each component. The aggregate tax is £462,167, so the QSR is apportioned as to

General component £70,500 ÷ £462,167 x £80,000 = £12,203

Survivorship component £156,667 ÷ £462,167 x £80,000 = £27,119

Settled component £235,000 ÷ £462,167 x £80,000 = £40,678

The tax payable by each component is now reduced as follows:

General component: £70,500 - £12,203 (QSR) = £58,297

Survivorship component: £156,667 - £27,119 (QSR) = £129,548

Settled component: £235,000 - £40,678 (QSR) = £194,322