Harriet Irving explores the peculiarities surrounding loss relief and inheritance currently catching many people out during the Covid-19 crisis.
Last year was the best year for global stock markets since the financial crisis in 2008; however, Covid-19 has done much to override this, causing a crash in equity markets around the world. For executors and beneficiaries, the recent downturn is something to consider carefully when deciding whether to keep or sell shareholdings inherited from a loved one.
Under UK inheritance tax (IHT) rules, when an individual dies their assets are valued at their market value to calculate any IHT. If shareholdings in a taxable estate are subsequently sold at a loss, then understandably the beneficiaries may feel that too much IHT has been paid. This is where IHT “loss relief” may be helpful in addressing any unfairness.
How does it work?
On the sale of shares, IHT loss relief substitutes the sale price of the shares for their value at the date of death, so that IHT is not paid on the unrealised difference. For example, if Ms Green owns 100 shares in Widgets Plc, which at her death are worth £100,000, and her estate pays IHT at 40% on those, this equates to £40,000 of tax. However, if her executors subsequently sell the shares when they are worth only £50,000, her executors can claim loss relief. This works as the sale price of £50,000 is substituted for the date of death value of £100,000, allowing them to receive an IHT refund of £20,000.
To be eligible for the relief, the shares have to be sold within 12 months of the date of death. Additionally, the relief applies for all qualifying shareholdings that have been sold in that 12-month period, so if some shareholdings are sold at a loss and some at a gain, these should be aggregated to check the overall position. Loss relief is also not available for unquoted shares or Aim-traded shares, although those types of shares may benefit from IHT business property relief.
Think it through
It is also important to be aware that the “appropriate person” must have sold the shares. In the context of administering an estate, this generally means that the executors need to have sold the shares, rather than beneficiaries who have received the shares from the executors.
Care, therefore, needs to be taken to ensure that any entitlement to the relief is not inadvertently lost by a transfer of assets. Once the appropriate person has sold the shares, they must fill out HMRC’s IHT35 form to claim the relief.
While a 12-month window may not seem problematic, a Grant of Probate will almost always be required to sell shares in an estate. Even in normal circumstances, it can often take months to obtain this and the current Covid-19 pandemic is causing further significant delays.
Additionally, obtaining a Grant of Probate involves ascertaining the values of all the assets and liabilities of the deceased, completing and submitting return of information for IHT purposes, and making an application to the Probate Registry.
Both HMRC and the Probate Registry are reporting delays in their turnaround times, although both have looked to mitigate these with a relaxation of certain rules around the signing of documents. Getting valuations of assets, particularly real estate and chattels where a physical inspection is generally required, is proving tricky in current circumstances, and asset providers and financial institutions are also taking longer than usual to provide information. Thus, in reality, the window available for executors to claim loss relief is diminishing.
So, what should executors and beneficiaries do?
Holding on to shareholdings in the hope that the markets bounce back is an option and may avoid incurring a loss at all. For some, however, the current crisis will be exacerbating the need for cash and the only viable option will be to sell the inherited shares.
In cases such as this, care should be taken to ensure that, if possible, the conditions for loss relief are met. Perhaps executors might discuss with investment managers holding shares as nominee whether there are any options available to realise the shares ahead of the Grant of Probate. In any event, especially in current circumstances, pressing ahead to apply for a Grant of Probate as soon as possible will be key in keeping the option of a loss relief claim open.
Harriet Irving is a senior associate at Stevens & Bolton LLP.