Many Estates are now in the position of paying Inheritance Tax (IHT) at a rate of 40%. For those who died in the last year with portfolios of quoted shares and securities the value of those shares included for IHT purposes may well have reflected buoyant stock market prices.
The COVID-19 pandemic has had a major impact on global stock markets. The value of many shares and unit trusts has fallen significantly. Quoted shares may have been sold to generate cash, diversify portfolios or to cut losses or alternatively executors may be considering just what to do now.
Qualifying Investments – What to look out for
Executors of Estates who have sold ‘qualifying investments’ that were part of the deceased’s Estate within 12 months of the date of the death may find that they can claim back some IHT paid on the Estate. The date of sale is the date of contract rather than settlement date.
For Estates where the person died within the last twelve months and where shares are standing at a loss compared to the value at the date of death it may be worthwhile selling shares to reduce or reclaim IHT at 40%. The executors need to carefully consider and calculate the potential IHT saving against the actual crystallisation of losses on the sale. The Executors need to consider how capital losses realised on the sale of shares can be utilised and generally to compare the tax position of shares sold by the Estate compared to the tax position if such shares were appropriated to the legatees before sale. In all situations, executors should ensure that they take investment advice from a qualified IFA or other appropriately qualified professional about realisation of shares or other securities before taking any action.
What are Qualifying Investments?
‘Qualifying investments’ are generally shares or securities which at the date of death are listed on a recognised stock exchange, UK government stock and holdings in authorised unit trusts. Private company shares, holdings in companies listed on the Alternative Investment Market (AIM) and loan notes are not covered by the relief.
Claim for relief
A claim for relief needs to include all qualifying investments sold within the twelve-month period following the date of death, not just those sold at a loss. The total proceeds from the sales is substituted for death values. There are also special rules that apply where investments of the same description are repurchased within two months of the last sale which have an effect of reducing the available loss. So, each case needs to be looked at based on its own facts and circumstances.
The claim for relief needs to be made by the ‘appropriate person’ who will generally be the executor, administrator, personal representative or trustees in held in a settlement. The claim for relief must be lodged with HMRC within four years of the date of death. If a claim is made after any qualifying investments have been distributed from the Estate, relief may not be available.
Relief for Land and buildings
A similar relief is available where land and buildings are sold within four years of the date of death. In this case, both a higher or lower value can be substituted for probate value. The date of exchange of contracts is usually the date of sale. An election cannot be made if there is no IHT payable and it will not generally be advantageous to make an election if the property was sold for more than probate value as this will increase the IHT payable. Also, the election cannot be made if the property has already been distributed from the Estate. All sales of land and buildings in the four-year period need to be included in the election which must be lodged with HMRC within seven years of the date of death.
What happens next?
Given the difficult financial times that many face with the COVID-19 pandemic, any opportunity to reduce or claim back IHT is welcome. If you have any questions or would like to discuss any of the above points in further detail, please get in touch with your usual Campbell Dallas contact.
The information in this update should not be regarded as financial advice. This is based on our understanding on 28 May 2020. Laws and tax rules may change in the future.