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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Estate Duty surviving spouse exemption: payment of duty ‘in respect of’ any ‘settled property’ since the date of ‘the settlement’

The phrases ‘in respect of’ and ‘in respect thereof’ were considered in IRC v Coutts and Co [1964] AC 1393. They were given a wide construction, as a result of which the exemption can apply notwithstanding that on the first death duty was paid not on the settled property itself but only on (and therefore ‘in respect of’) the settled property in which the interest subsisted. For example, the exemption is regarded as applicable in appropriate circumstances to the underlying property despite the fact that duty was paid on the first death on the value of a ‘pur autre vie’ interest in the settled property.

This should be contrasted with the situation where the payment of duty on the first death was on a part only (IHTM04454) of the settled property.

If the payment of duty on the death of the first spouse to die was on a reversionary interest in the settled property, exemption is not available on the death of the surviving spouse unless the reversioner was the settlor s.55 F(1909 - 10)A 1910, and Bunbury v IRC [1973] Ch 1.

The phrases ‘settled property’ and ‘the settlement’ have to be interpreted in the light of the judgements in the Coutts case. Exemption is available only if and to the extent that

  • a claim for duty arises on the second death on the same ‘settled property’ in respect of which duty was paid on the first death, and
  • the second spouse to die was not competent to dispose (IHTM04457) of that ‘settled property’, or any part of it (as distinct from an interest in that settled property) at the date of the second death or at any time during the continuance of ‘the settlement’. This may give rise to problems of identification, especially in the cases of a chain of dispositions, and of settlements the provisions of which have been subsequently modified. However, if one settlement has been terminated and replaced by another, it may not be easy to trace the ‘settled property’ as a continuing entity through to the second death.

When faced with a situation in which the trusts of a settlement have been terminated or modified between the deaths of the spouses, it is a matter of construction whether the settlement should be regarded as a compound one involving a single comprehensive set of trusts and a single settled fund, or whether the original settlement has come to an end and been replaced by a new one. In borderline cases you should take the view most favourable to the taxpayer. You should apply the following general rules and refer any case of doubt to TG .

If there has been a measurable interval during which the trust property was not ‘settled property’, you should refuse exemption on the second death, the reason being that the trust property can no longer be regarded as the same ‘settled property’ that bore duty on the first death.

If the trusts of a settlement have merely been modified, you should allow the exemption.


Property settled on husband for life, then to wife for life, then to B absolutely.

After the husband’s death, the settlement was varied by the wife and B, so that the fund was thereafter held to pay an annuity to the wife for life and, subject thereto, for B for life with remainder to C.

Exemption is allowed because the trust fund has had a continuing identifiable existence as a trust fund between the two deaths.

If an existing settlement is brought to an end and the property subject to it is immediately resettled on new trusts, without the lapse of a measurable interval during which it was unsettled, you should allow the exemption (if otherwise permissible) even though, on a strict construction of the wording of FA1894/5 (2), it might be argued that the exemption did not apply because the settlement in existence at the first death did not remain on foot at the second death.