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Providing advice to executors after a client has passed away is part and parcel of our job. It’s a sensitive time, particularly if they are also beneficiaries of the estate, where they require clear and relevant advice to guide them through. The recent downturn in global markets throws up an additional challenge for anyone in this situation.

Inheritance Tax (IHT) is paid on the value of the estate at the date of death. In cases where the individual died before the current market downturn, if they hold shares or assets which have been affected by the economic turmoil the value of their estate is likely to have decreased significantly since.

This discrepancy can result in an IHT bill which is markedly higher than it would have been if it were based on share prices after the crash, and the notion that the executors have ‘overpaid’. However, there is a way for executors and beneficiaries in this situation to claim back some of the IHT they have paid to reflect the loss caused by the market downturn.

The process

IHT share loss relief is a way of recalculating an estate’s Inheritance Tax bill in situations where the executors sell shares or investments at a loss within 12 months of the date of death, usually when they are administering the estate. The relief applies to all ‘qualifying investments’. These are general shares or securities listed on a recognised stock exchange and/or holdings in authorised unit trusts.

To allow them to sell the shares, executors will need to obtain a grant of probate which they can do once they have paid the initial Inheritance Tax bill. They can then claim share loss relief by choosing to replace the value of the shares at the date of death in the Inheritance Tax with their actual value when sold. HMRC recalculate the IHT figure to reflect the new estate value and then repay the beneficiaries the excess tax amount.

Example

– Peter, a widower, died on 15 January 2020.

– His estate, which was subject to inheritance tax, included a share portfolio worth £100,000 at the time of death.

– However, subsequent market activity saw a drop in value of the shares to £70,000 at the time they were sold.

– The beneficiaries can recalculate the IHT bill to take account of this £30,000 loss and claim a reduction of £12,000 from HMRC.  (£100,000 – £70,000 = £30,000 x 40%).

Beneficiaries or executors looking to take this route need to be aware of a number of further points.

Anti-avoidance rule: There is a rule in place which forbids selling and repurchasing the shares within a two-month window. This is intended to stop people from selling the shares simply to create a loss, claiming the tax relief and then buying the same or different shares back again.

Relief applies to net loss: When calculating their share loss, the beneficiaries need to include all qualifying investments they have sold, not just the ones they sold at a loss. The relief applies to the net loss on the sale of all investments within the twelve months since death. This means that if some investments were sold at a profit this will reduce the loss figure on which you can reclaim the IHT. It’s worth noting in this instance that where executors are seeking to sell shares that have a higher value than at probate, they can defer the sale until after twelve months have elapsed since death.

Is selling the right option? There is also the question for beneficiaries who inherit a share portfolio whether they would want to sell at all. They might feel that, given current market uncertainty, they would be better off holding on to the stock portfolio until markets recover, depending on their attitude and their own financial planning. Opting to exit the market at a time of such volatility and lack of visibility risks missing out on any recovery. Executors are also at liberty to sell just the shares that are showing losses and retain those they are more optimistic about demonstrating recovery in future.

Implications for Capital Gains Tax (CGT): Inheritance Tax and Capital Gains Tax are closely bound together. If IHT is paid on an asset on death usually there isn’t a Capital Gains Tax charge at the same time. However, when an IHT claim is made for a loss on the sale of the shares, the base cost for Capital Gains Tax will also be substituted for the market value of the shares when they were sold. This means that executors will not benefit from the loss twice.

Effect on the Residence Nil Rate Band (RNRB): An IHT share loss relief claim will also reduce the value of the estate when calculating the available Residence Nil Rate Band (RNRB). The new, substituted value will be used to determine whether the threshold has been passed. This delivers a further potential tax benefit if some or all of the RNRB is reinstated.

Properties: It is also worth noting that if a property is sold for less than its value at the date of death then this may also allow a claim to be made to HMRC for a reduction in the IHT paid. This relief is available for up to four years after the date of death, but crucially only applies if the sale is made by the executors.

If you are in this situation and would like some advice, our advisers and our combined tax, legal and financial expertise are on hand to provide support and guidance tailored to your circumstances.

This document is for educational purposes only and does not constitute advice.  Any tax relief is based on current UK legislation, which may be subject to change at any time.

Author Martin Hasyn

Director, Private Law

Martin has more than 15 years’ experience, specialising in wealth and succession planning, with a particular focus on business owners and entrepreneurs.

Learn more about Martin Hasyn

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