Families who inherit assets and then die within five years could see their inheritance tax bill reduced to zero under a little-known HMRC rule. The provision, known as quick succession relief or successive charges relief, is intended to prevent the same asset from being taxed twice in a short period. With Andy Burnham now installed as Prime Minister, interest in such reliefs is soaring as households look to shield their wealth from any potential tax changes.
Chris Etherington, of accountancy firm RSM, described the relief as “niche” but potentially “highly valuable” for those who know how and when to use it. He explained that the relief applies when an individual receives an inheritance, pays inheritance tax on it, and then dies within five years, leaving those same assets to their own beneficiaries.
How the relief works
Under Section 141 of the Inheritance Tax Act 1984, families can apply for a reduction in the inheritance tax charged on assets that have already been subject to the standard 40 per cent levy within the previous five years. The relief scales according to the time elapsed between the two deaths. If both deaths occur within the same year, beneficiaries receive 100 per cent relief, meaning the second inheritance tax bill could be eliminated entirely. That relief falls to 80 per cent when the second death comes between one and two years later, and then tapers further until no relief is available after five years.
The purpose of the provision is to avoid double taxation on an asset within a short space of time. Without it, a family could be forced to pay inheritance tax on the same wealth twice as it moves down through the generations.
Why it is not better known
Mr Etherington noted that the relief is not widely understood because it requires two deaths to occur within a five-year window and for both estates to be large enough to trigger inheritance tax in the first place. “As the relief is dependent on two deaths occurring within five years, and both estates being large enough to incur inheritance tax, it is not very well known,” he said.
However, he added that the potential benefit is substantial. “As the relief can be significant, it is worthwhile for executors and advisers to check whether quick succession relief may apply,” he said. The check requires investigating whether the deceased individual had previously inherited assets on which inheritance tax had been paid.
Conditions and exclusions
The relief cannot be claimed if the original transfer of assets was exempt from inheritance tax, such as a transfer between spouses or civil partners. So the key is to establish whether inheritance tax was actually paid on the earlier transfer. Executors and advisers are therefore urged to look closely at the financial history of the deceased.
Even where relief is available, the amount will depend on how long the beneficiary survived after receiving the inheritance. The shorter the interval, the higher the reduction, with a 100 per cent reduction for deaths within the first year and 80 per cent in the second year. The relief is applied proportionally to the inheritance tax paid on the earlier transfer.
Political backdrop
The arrival of a Labour government led by Andy Burnham has prompted many families to review their inheritance tax planning. Speculation about potential changes to tax rules has increased enquiries to advisers about ways to legitimately reduce future tax bills. Quick succession relief is one of several existing provisions that can help, but it requires careful planning and awareness.
To make a claim, executors need to gather documentation showing the earlier inheritance tax payment. This may involve contacting the previous estate’s solicitors or accountants. Because the rules are technical, professional advice is often essential to ensure the relief is correctly claimed and that families receive the full benefit.
As Mr Etherington pointed out, the relief is niche, but for those who meet the conditions it can prove highly valuable. With the political and economic climate shifting, it is a provision that is likely to attract more attention in the coming months.
