Wealth Management

Inheritance Tax Relief on the sale of assets within an Estate

One of the first duties of being an executor, is to obtain valuations as at the date of death for all assets of the estate. These values, commonly referred to as probate values, will form the basis of the calculation for Inheritance Tax, and provided they are agreed with HM Revenue & Customs (HMRC) will also form the base cost for Capital Gains Tax moving forward.

14th May 2024

In many cases, the assets of the estate may be sold, and the proceeds distributed to the beneficiaries during the administration of the estate. However, as it is necessary for probate to be granted before assets can be sold, it is not uncommon for many months to have passed by before these disposals can take place.

During this time, market values can fluctuate, and the assets may end up being sold for less than probate value. This is particularly relevant now given the current economic situation and downturn of the housing market, however there is an Inheritance Tax (IHT) relief that applies to the sale of property and listed shares below probate value that could lead to a valuable refund of IHT.

If IHT was paid on a higher value than the eventual sale proceeds and the sale takes place within a specified period from death (see below), then ‘Inheritance Tax Loss Relief’ allows the appropriate persons (usually the executors of the estate) to apply for a refund of IHT from HMRC.

The rules are slightly different depending on the asset being sold and these have been detailed below.

Listed shares

A claim for loss relief can be made on the sale of listed shares within 12 months of death. There are some restrictions though, all sales of shares must be considered, which means that if some have sold at a higher value those must also be included in the calculation which will reduce the overall tax refund available.

There is a potential planning opportunity here in respect of the timing of the sale of shares depending on whether they are standing at a gain or loss during this time period.

Land and Property

A claim for loss relief can be made on the sale of land and property sold within 4 years of death. As with shares there are some restrictions, all sales during the 4 years must be taken into account (with exception of property sold for a higher price in the forth year) and the overall loss must be more than £1,000 or 5% of the probate valuation (whichever is lower).

The loss relief only applies for actual sales of the assets and does not apply to transfers to beneficiaries of the estate, however, see below for where this may be relevant.

Where there has been an overall decrease in value on the assets disposed of within the necessary time period, a claim can be made to substitute the probate value for the sale value. The original IHT calculation can therefore be amended and a refund obtained. Given IHT is charged at 40%, this could lead to a valuable refund.

It is important to note that this relief must be claimed on the relevant HMRC form by the executors as HMRC will not automatically refund IHT paid. Executors have 4 years from the end of the relevant period (12 months for shares and 3 years for land) to make a claim.

This relief does not apply where there was no liability to IHT on the estate, which would be the case where the value of the assets fell within the available nil rate bands. In these circumstances and where losses are likely, if they cannot be offset against other gains in the estate, it may be beneficial to appoint the assets out to the beneficiaries of the estate, via deed, before they are sold. Upon sale, the beneficiaries could then use these losses against other gains they may incur, either in the year of sale or in future years, thereby reducing their overall Capital Gains Tax liability.

How can Old Mill help?

If you would like any further information regarding the above or help with a possible IHT loss relief claim, please do not hesitate to get in touch with your usual Old Mill contact or one of our estate specialists.  Click here….