How to calculate QSR
After any reliefs, exemptions and the available nil rate band (£0 - £325,000) have been deducted from the deceased’s death estate, inheritance tax (IHT) is usually charged at 40%. QSR is then applied to reduce the tax liability, and is calculated using the following formula:
IHT paid previously is the amount of IHT paid on the original transfer; this is then multiplied by the relevant percentage.
The relevant % depends on the number of years between the date of the transfer to the deceased, and their death:
- 100% if death was within one year of the original transfer
- 80% within two years
- 60% within three years
- 40% within four years
- 20% within five years
The increase in estate is the amount the deceased’s estate is increased by because of the original transfer. Increase in estate + IHT paid previously is that same figure plus the IHT paid in respect of that transfer.
Example
You are acting for the deceased who inherited an asset before they died valued at £100,000 in January 2023. IHT at 40% was charged in respect of the asset. This increased the value of the estate from £3,500,000 to £3,600,000.
Should the death of the beneficiary have occurred within a year of the gift, the IHT liability on the estate will be reduced by QSR in the amount of £28,571.
Tax-free or tax-bearing?
The QSR calculation differs depending on whether the original gift was tax-free or tax-bearing. A tax-free gift is one where the legatee (recipient) did not pay the IHT due on the transfer, i.e., where the tax was paid from the residue of the estate. A tax-bearing gift is one where the legatee was liable for the IHT on transfer, which will in turn reduce the increase in the value of the estate as a result of the transfer.
In effect, the QSR available would be larger if the original gift was tax-free as opposed to tax-bearing, as there would also be a greater increase in the deceased’s estate.
The above example is on the basis that the legacy was left ‘tax-free’, which would be the case where the Will does not specify that the tax is to be paid by the beneficiary. The below is an example where the IHT was payable by the beneficiary.
