There is a little known exemption from Inheritance Tax (IHT) which means that when a member or former member of the Armed Forces dies as a result of injuries or disease sustained whilst on active service, their whole estate is exempt from the payment of IHT which would normally be levied at a rate of 40%. This is often overlooked, resulting in unnecessary tax being paid and the estate of the serviceman reduced for their surviving family.
Some points to note:
- It is applicable to members or former members of the Armed Forces
- The death does not have to be caused by the injury or disease but would qualify if the death included active service as a contributory factor. The IHT Act 1984 s 154 says
“that he died from a wound inflicted, accident occurring or disease contracted at a time when the conditions specified below were satisfied
–active service against an enemy or
-other service of a warlike nature or which in the opinion of the Treasury involved the same risks as service of a war like nature
Or that he died from a disease contracted at some previous time, the death being due to or hastened by the aggravation of the disease during a period when those conditions were satisfied”
- So the death might occur when a former soldier is at a ripe old age, but if the old injury or disease can be shown to have had a bearing on the cause of death, the exemption will apply
- To apply for the exemption, an application has to be made to the Service Personnel and Veterans Agency
- A knock on benefit of this exemption occurs on the later death of a spouse of a serviceman. Now that the personal nil rate band of a spouse can be carried forward to add to the spouse’s nil rate band on the second death, this will mean that if the first spouse’s estate was exempt from IHT due to a service related death, then two nil rate bands will still be available when the second spouse dies. On the current IHT exemptions, that would mean that £650,000 could pass under the serviceman’s spouse’s estate before IHT is levied.
Our Armed Forces are becoming increasing involved in action around the world and it is likely that this exemption will apply to more estates, if not immediately, in some years to come.
The increase in services by the Armed Forces and other agencies may make the definition above of “other service of a warlike nature or which in the opinion of the Treasury involved the same risks as service of a war like nature” important.
Whoever is dealing with the estate needs to be aware of the way in which it works, as if it is not applied for, it won’t be offered as a gift by HMRC. For estates which have already been concluded, it may be possible to ask for a refund of IHT paid on the basis of this exemption, if granted.
For more information about this or any other matter please contact our private client team.
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