Estate Duty surviving spouse exemption: part of fund not dutiable on the first death
If duty was paid on part only of the settled property on the death of the first spouse, the exemption on the death of the surviving spouse will extend to the rateable proportion of the settled property then comprising the trust fund. Examples include where
- duty was paid on an annuity slice on the first death,
- a discretionary or accumulation trust was involved,
- the fund included non-dutiable property on the first death (IHTM04453)
- further property has accrued (IHTM04455) to the settled fund since the first death.
In practice, if it is necessary to ascertain an annuity slice on each of the two deaths in question, you may identify the two slices with each other if it is to the taxpayer’s advantage, so far as circumstances permit. But if further property has accrued to the settled fund between the two deaths, the slice of the accruals will be taxable unless they are held for beneficiaries who, subject to the annuity, take absolutely.
If you encounter a case involving an annuity, please refer it Technical for advice if it is not covered by this instruction.
Discretionary or accumulation trusts
If the claim for duty arose under FA1894/S2 (1)(b)(iii) or (iv), under a discretionary or accumulation trust, on a death after 15 April 1969, it may still be possible to secure exemption on the later death of a surviving spouse who was then entitled to an interest in possession in the settled property. This position is achieved by the provisions of FA69/SCH17/PARA6), which were designed to remove the uncertainty as to whether the ‘slice’ taxable on the second death was the same as that dutiable on the first death. The equivalent provision in Northern Ireland is para 5 pt 2 Sch 1 FA (NI) 1969 which applies to deaths on or after 3 June 1969.
The principle is that the proportion of the property taxable on the later death is identified first with the proportion that would have passed on the later death if it had occurred at the same time as the earlier death, and, second, with the proportion that passed on the earlier death.
Property was settled on a discretionary trust for a class including a husband Graham and his wife Catherine, during Graham’s life, with remainder to pay an annuity of £500 (being an interest in possession) to Catherine for her life, with remainder to Trevor for life. On Graham’s death Estate Duty was paid (under s.2(1)(b)(iii)) on 27% of the fund; if Catherine had died at the same time, 23% of the fund would have been dutiable on her death. At Catherine’s death the annuity is absorbing 40% of the trust income. Exemption is due on 40% - 23% or 17% of the fund. (If, on Graham’s death, duty had been paid on only 15% of the fund, exemption would be limited to that proportion.)
If different parts of the property comprised in a settlement are held on different trusts, there is deemed to be a separate settlement of each of those parts.
Property is held on trust to pay half the income to Philip for life, and, subject thereto, for his wife Deborah and others on a discretionary trust. On the death of Deborah before Philip, the two half shares are held on different trusts and no part of the fund dutiable on Deborah’s death can be identified with the half share taxable on the later death of Philip.