Terminology explained

Quick Succession Relief (QSR)

Quick Succession Relief is a measure under section 141 of the Inheritance Tax Act 1984 designed to prevent double taxation of the same assets within five years due to inheritance. It offers a reduction in inheritance tax on a deceased's estate by considering the tax paid on a previous transfer, the benefit received by the deceased from that transfer, and the time elapsed between the transfer and death. Relief ranges from 100% if death occurs within one year of the first, to 20% within five years.

Successive Transfers

Successive Transfers refer to the consecutive passing of assets through multiple estates, typically when assets are inherited by beneficiaries who themselves die shortly thereafter. This situation can potentially lead to multiple incidences of Inheritance Tax (IHT) within a short period. Planning for Successive Transfers can involve strategies like setting up trusts or taking advantage of reliefs such as Quick Succession Relief to mitigate the IHT burden across sequential inheritances.

Replacement Relief

This relief concerns the replacement of business properties. If a replacement property is not acquired before the individual's death, any potential business property relief is forfeited. The relief for any replacements made within five years cannot exceed the amount that would have been available had no replacement occurred.

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Scenario background

Dennis

Lizzie

Dennis and Lizzie are father and daughter.

Dennis holds a 25% interest in a dental practice in which he is a co-founder.

Dennis recently retired and upon doing so, sold his interest in the dental practice to his other business partners for £200k.

Dennis has been thinking about the succession of his estate, and wants to reduce his exposure to Inheritance Tax (IHT) to maximise the value that Lizzie receives.

He is therefore considering investment in a BR-qualifying Alternative Investment Market (AIM) portfolio.

Both the shares in the dental practice and the shares in the AIM portfolio are potentially qualifying BR assets.

Scenario 1

• Dennis has been retired for four years before re-investing his sale proceeds into the AIM portfolio.
• Dennis dies just months later, leaving his AIM portfolio to Lizzie.
• Lizzie dies a year later.

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Dennis’ Inheritance Tax (IHT) position

Asset:

£200k Assets

Tax Payable:

£80,000

Dennis is not eligible to claim BR on the AIM portfolio. This is because he had not held the AIM portfolio for two years, and failed to reinvest the proceeds from the sale of the dental practice in the AIM portfolio within the three year window required for replacement relief.

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Lizzie's Inheritance Tax position

Asset:

£200k Assets

Tax Payable:

£16,000 - £80,000

Lizzie is not eligible to claim BR on the AIM portfolio. This is because she has not met the qualifying period of ownership, nor had Dennis met the criteria on her death. However, Quick Succession Relief (QSR) may be available to reduce her IHT liability.*

*The amount of QSR available will depend on Dennis and Lizzie's broader IHT position but could be up to £64,000 (being 80% of the £80k previously paid).

Scenario 2

• Dennis has been retired for less than a year before reinvesting his sale proceeds into the AIM portfolio.
• Dennis dies just months later, leaving his AIM portfolio to Lizzie.
• Lizzie dies a year later.

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Dennis’ Inheritance Tax (IHT) position

Asset:

£200k BR Assets

Tax Payable:

Nil

Dennis is eligible for BR on the AIM portfolio due to the replacement of a BR asset within a three year window period of ownership rule.

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Lizzie's Inheritance Tax position

Asset:

£200k Assets

Tax Payable:

Nil

Lizzie is eligible for BR on the AIM portfolio, despite not personally owning the asset for two years, due to the successive transfers within a two year period rule.

Takeaway

Lizzie continuing to hold the BR assets has impacted her IHT exposure on death.

Had she sold the BR assets and replaced with non-BR assets, these would have been subject to IHT.

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Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.

Important notice: This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.

This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.

Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing LLP as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.