Techzone

Advising the executors of a deceased client can be a sensitive and challenging time especially if they are also the beneficiaries of the estate. But where the client died before the current market downturn it can present some new challenges. IHT has to be paid on the estate value at the date of death, even though some of the assets in the estate may have subsequently taken a significant hit on the back of stock market falls since the Covid19 outbreak began.

However, relief may be available which allows the executors to reclaim some of the IHT they have already paid. This is known as IHT share loss relief and allows the IHT bill to be recalculated if the executors sell quoted shares/collective investments at a loss during the administration period.

The executors dilemma

While the general advice right now for most investors might be to hold tight and wait for markets to recover, executors face an additional dilemma. They may be inclined to pass the shares directly to the beneficiary and allow them to determine the best time to sell. If the shares haven't recovered by the time they are sold any losses can be carried-forward to use against any other gains they may have.

But by passing the shares to the beneficiary they could be missing out on relief from IHT at 40% to save CGT at 10% or 20%. Relief is only available when the executors sell shares and it is generally not available when they are passed in-specie to a beneficiary. So it can be beneficial to dispose of the shares and pass the proceeds, potentially including the reclaimed IHT, to the beneficiary who is free to reinvest it should they choose.

Executors have up to 12 months from the date of death to sell the quoted shares if they wish to claim the relief. Administering certain estates can be a lengthy process so executors may need to keep this deadline in mind if they plan to reclaim IHT already paid.

How it works

Before they can sell, executors will normally need to obtain a grant of probate which they will not get until IHT has been paid. This will be based on the value of the estate at the date of death.

Loss relief on the sale of quoted shares is claimed by electing to replace their value at the date of death in the IHT account with the actual sales value. IHT is recalculated on the lower value of the estate, and a repayment of IHT will follow.

This scenario is likely to be more common right now following the drop in stock market values. Looking to the FTSE 100 as an indicator over the last 12 months, the index was consistently above the 7,000 points until the end of February 2020.

Since then, values have dropped by over 33% at their lowest level, and at the time of writing it is sitting around 6,000. This would suggest that where the deceased died before the crash, there is an increased chance that the estate could be holding investments below the date of death value.

IHT v CGT

IHT and CGT are inextricably linked. If IHT is paid on an asset on death then generally there isn't a charge to CGT at the same time

Claiming the IHT loss relief
Claiming IHT loss on sale of shares relief will also amend the base cost for CGT. The executors will normally acquire the shares or OEICs at a base cost equal to the value at the date of death (often referred to as 'market uplift'). If a claim is made for a loss on sale of shares, then the base cost for CGT will also be substituted for the market value of the shares when they were sold. Effectively, this means that executors will not benefit from the loss twice.

Not claiming IHT loss relief – the CGT benefits
If there is no IHT payable on the estate, there would seem little point in claiming for loss relief. For example, smaller estates, or estates which are passing to the surviving spouse will not see any benefit.

If executors are selling the shares anyway, there may be more benefit to using the loss to offset other capital gains on any other assets in the estate.

Alternatively, they could distribute the shares to a beneficiary as part of their share of residue. The cost of the shares for the beneficiary would be their value at the date of death, allowing them to potentially sell at a loss which they could use against gains on their own portfolio, or wait for the share price to recover to their date of death value, effectively giving them a 'tax free' gain.

Of course, if IHT can be reclaimed, then the 40% saving that this would produce is always going to beat the CGT saving of 20%. This means that there will be more residue to distribute to the beneficiaries of the estate.

Even if shares are transferred at a loss to beneficiaries, the top rate of CGT saved is 20% for higher and additional rate taxpayers.

The amount of relief that can be claimed will be reduced, or wiped out completely, if qualifying shares showing a gain are also sold in the 12 months after death.

Mix and match
To maximise the amount of relief, executors could consider just selling shares with a loss in the first 12 months, and maybe transferring shares with a gain to beneficiaries in satisfaction of their legacy.

Note, there are provisions which restrict the amount of loss that can be claimed if executors buy back the same shares they have sold within the 12 months after the date of death.

Residence nil rate band
A claim for loss relief on shares will also reduce the value of the estate for the purposes of calculating the available residence nil rate band (RNRB). The substituted value will be used to determine whether the £2M taper threshold has been breached. So as well as the reduction in IHT resulting from a claim for a loss on sale of shares, there could be a further tax saving if some or all of the RNRB is reinstated.

The rules

There are, of course, conditions which must be met in order to claim the relief. Broadly, these are:

The shares sold must be 'qualifying investments'
These include shares and securities listed on a recognised stock exchange, authorised unit trusts and OEICs. Unlisted shares, AIM shares and investment bonds are not qualifying.

The shares must be sold within 12 months of the date of death
If during the period since death shares have become suspended or shares have been cancelled because a company is no longer trading, relief may still be available. Suspended shares will deem to have been sold at the end of the 12 month period for their value at that time and any shares that have been cancelled will have deemed sale proceeds of £1.

In addition to actual sales of shares, shares transferred to a beneficiary in satisfaction of a pecuniary legacy in the will, and with the consent of the beneficiary, also count as sales. But this is only where the beneficiary is entitled to a fixed cash amount from the estate rather than a share of the residue.

Claims must be made within five years from the date of death
Although the sale has to be made within 12 months of the date of death, the claim for relief can be made up to five years from the date of death. Relief is claimed by completing form IHT35.

The shares must be sold by the appropriate person
The appropriate person is the person who is liable for the tax. This will usually be the executors/ personal representatives dealing with the assets in the free estate. It could also be the trustees who may be liable for paying tax on a trust in which the deceased held an interest in possession.

Summary

For those dealing with the estates of individuals that have died in the last 12 months, minimising the amount of IHT paid by applying for relief is very important. Executors will want to ensure that they maximise the amount available for distribution to beneficiaries, and you may therefore wish to make them aware of this possibility.