In these uncertain times caused by the COVID-19 pandemic, global markets are experiencing unprecedented fluctuations.
We are therefore being asked by clients whether Inheritance Tax (“IHT”) could be reclaimed if shares are sold at a loss compared to the date of death value?
How is Inheritance Tax originally paid?
First, it is important to remind ourselves how HM Revenue and Customs (“HMRC”) initially calculate the IHT due on a person’s estate. HMRC will calculate the IHT due by looking at the value of the deceased’s assets at the date of death. Where IHT is payable on an estate, you will be required to obtain a formal written valuation of the deceased’s shareholdings and this must declare the value as of the exact date of death.
When paying the IHT on a person’s death, HMRC are initially not too concerned if the value of the shares go up or down after the date of death. There are merely concerned with the value as of the date of death as that is what is subject to IHT.
If the value of the shares increases between date of death and date of sale, capital gains tax by could be payable to HMRC on the “gain”. There are various ways we can help to try and mitigate this.
If the value of the shares decreases between date of death and date of sale, there is the opportunity to reclaim some of the IHT that was paid on the date of death value. This is what we shall discuss here. It should be noted however, that if the estate has not paid any IHT to begin with, no relief or IHT reclaim is available.
Loss on sale of shares relief
Firstly, this relief (namely a refund of IHT) can only be claimed if there has been an actual sale of the deceased’s shares after death. It is not enough that the value of a portfolio or shareholding has merely reduced in these uncertain economic times. The shares themselves must have been sold.
Introduced by the Finance Act 1973, and now contained within ss. 178 – 189 Inheritance Tax Act 1984, loss on sale of shares relief allows a personal representative to reclaim IHT if shares within the deceased person’s estate are sold after death for a loss. In basic terms, the value of the shares at the date of death (known as the “death value”) can be replaced by their value at the time of the later sale (known as the “sale value”).
Provided that the claim for IHT relief is made within 4 years of the end of the 12 month period during which a qualifying sale may be made, an individual will be successful if (s)he can satisfy the following four conditions:
- The shares being sold must be “qualifying investments”;
- Sold within 12 months immediately following the date of death;
- By an “appropriate person”;
- For an overall loss.
What is a “qualifying investment”?
“Qualifying investments” are specifically defined. This primarily covers listed shares and securities (including those listed on recognised foreign stock exchanges) and unit trusts.
This means that, if the shares are either unlisted or training on the Alternative Investment Market (AIM) they will not be regarded as “qualifying investments”, and IHT relief will be unavailable where they are sold at a loss.
Who is an “Appropriate Person”?
An “appropriate person” is simply the individual who is liable for the tax. This is usually the Personal Representatives (“PRs”) of the deceased i.e the executors or administrators. It is the appropriate person(s) who must make the claim for IHT relief; beneficiaries would not qualify as appropriate people and would fail to obtain IHT relief.
Overall loss in value on the sale of shares
The rules are clear that relief is only available where:
- The gross sale proceeds;
- Of all shares sold by the appropriate person;
- Within 12 months of death;
- Is less than the death value of those shares.
It is therefore very important to note that the claim must include all sales of qualifying investments if it is to successfully obtain relief, not just those that have fallen in value. HMRC will not allow you to cherry pick the shares which have sold for a loss, to claim an IHT refund. Care must be taken to therefore not apply for the relief until you have sold and analysed the overall position of all shareholdings in the 12 months after death.
However, even where the estate can successfully satisfy the above four conditions, the personal representatives must be wary of additional rules and restrictions which can also prevent a claim. The rules are complex and therefore we recommend seeking professional advice in all cases. Failure by a personal representative to make the claim, if it would have been successful and resulted in a refund of IHT, could result in personal liability.
If you have any queries about any issues raised in this blog, please do not hesitate to contact our Private Client team.
Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.