Applying for Inheritance Tax share loss relief after a market downturn

Losing a loved one can be a difficult time in anyone’s life, and is an occasion when they will need as much support and advice as they can gather from their families, friends and wider networks.

As solicitors, we are often called upon to play our professional part in this wider support network and if the deceased leaves an estate that is liable for Inheritance Tax (IHT), we can provide specific and timely guidance to help steer the family through this process.

At times of volatility and fluctuation in the global stock markets as we have seen in 2022, there is potentially another consideration for executors and families in this situation to bear in mind.

Inheritance Tax (IHT) is paid on the value of the estate at the date of death. In cases where an individual dies before a 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 market fluctuation can result in an IHT bill which is markedly higher than it would have been if calculated based on share prices after the dip. It can leave the administrators of the estate feeling as if they have ‘overpaid’ on their Inheritance Tax.

However, IHT share loss relief provides 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.

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 usually 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 return with their actual value when sold. HMRC will then recalculate the IHT figure to reflect the new estate value and then repay the beneficiaries the excess tax amount.

Anyone looking to use this relief should also bear in mind 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.

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.

Also applies to 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 would like some advice, please get in touch. Our tax, legal and financial advisers can provide the support and guidance tailored to your circumstances.