One of the effects of the coronavirus pandemic is widespread economic volatility with the result that many people have watched their investments tumble in value over the past couple of months.
These market swings will have particular resonance for executors dealing with the estates of the recently deceased. When someone dies, their assets are valued as at the date of death for inheritance tax purposes. These are then reported to HMRC and inheritance tax paid on these figures if due. However, if certain assets drop in value following the date of death, it may be possible to reduce the amount of tax payable which will be of particular interest to executors, not least as in effect only 60% of the loss in value of assets is suffered by the estate.
Investments
The executors can submit an inheritance tax loss relief claim if they sell qualifying securities within 12 months of the date of death if the gross sale value is less than the probate value.
The claim needs to be submitted within four years from the end of the period in which the claim could arise, i.e. within five years in total from the date of death.
Qualifying investments are:
- Shares and securities listed on a recognised stock exchange at the date of death
- UK government stock
- Holdings in unit trusts and open-ended investment companies
Qualifying investments do not include holdings in unlisted companies, holdings in companies listed on the Alternative Investment Market (AIM) or loan notes.
When making any claim, you need to consider and report all sales and purchases, capital payments or charges to holdings during the period. It is the net loss figure which will be considered, which is based on the disposal price achieved (but ignoring commission and costs).
Investments given to a beneficiary to satisfy a cash legacy can count as a sale with their consent, but only if the personal representatives did not have power to do this without consent.
Properties
The same principle applies for properties and land. Executors have four years from the date of death to sell a property asset. If the asset sells for less than the probate value, the executors can submit an IHT loss relief claim for the difference.
The claim needs to be submitted within three years from the end of the period in which the claim could arise, i.e. within seven years in total from the date of death. These periods could be extended if the sale is to an authority with compulsory purchase powers (for instance if selling land to HS2).
The relief is based on the gross sale price and does not consider any costs of sale. As sales to beneficiaries, or relatives of beneficiaries, do not qualify for the relief, any profits made on sales and purchases of property and land in the estate to beneficiaries could jeopardise the relief on others.
However, it must be noted that a claim can only be made if the reduction in value is £1000 or 5% of the value of the asset at the date of death, whichever is the lower.
As an executor, it is your responsibility to ensure that the sale price was the best you could reasonably obtain. When making a claim you need to be clear about whether anything was different about the property, or if the estate had received any statutory compensation or insurance claims in relation to the property between the date of death and date of sale.
It is important to stress that, for both types of assets, the disposals must be undertaken by the executors and not by beneficiaries following appropriation of assets. If the claim is made after the assets have been distributed to the beneficiaries, the relief may not be granted.
Capital Gains Tax (CGT)
Assets owned by the deceased are revalued at the date of death. The market value at the date of death becomes the new base value for the assets, with all inbuilt gains being cleared with no capital gains tax charge.
This gives a new starting base value for the executors when considering what happens to the asset. An estate has its own annual capital gains tax allowance, equal to the individual exemption allowance (£12,300 for 2020/21) for the financial year in which the death occurred, and the two following financial years.
Any capital gains tax is payable at 20% (28% for residential property gains). The actual tax has, until now, been generally due by 31 January in the year following the end of the tax year in which the gain occurred. However, since 6 April 2020 any capital gains tax due on residential property is now payable within 30 days of the gain. Executors may claim some allowances against gains made on administration sales.
Unlike the value of quoted investments at the date of death, which are set, HMRC will not usually formally agree a property valuation submitted at the date of death if it is not subject to inheritance tax.
Therefore, if it is thought that a gain or loss has occurred on the property value since the date of death, it may be necessary for the executors to agree the date of death value with HMRC.
With a fall in values post death, executors may be able to offset the losses on some assets against other gains within the estate. Although if an inheritance tax loss relief claim were made, the gross sale proceed would be treated as the executor’s base cost. The only loss then would be the amount of the sale expenses.
Assets are transferred to legatees/beneficiaries at the date of death value for capital gains tax purposes, so any post-death losses can be crystallised and used by those receiving the assets if this is advantageous to their own circumstances.
Losses by the deceased in the tax year of death
Another aspect which may be of benefit to executors at times of falling capital values is that any losses incurred by the deceased in the final current tax year of death, can still be offset against gains in that year and if there remains a balance available, be offset against earlier gains over the previous three tax years.
The tax rules around CGT and IHT are notoriously complicated, which is why the Office for Tax Simplification carried out a consultation two years ago asking for the views not only of professionals but also members of the general public on ways to simplify IHT. Administering an estate is an onerous business due to the number of forms that have to be completed and the amount of cross-referencing that is required. The more complex the estate, the more onerous the administration, making it very easy for an executor, unfamiliar with the system, to overlook a potential relief, or reliefs, or worse, missing something that might be material as far as HMRC is concerned when assessing liability for IHT.
Our probate team has years of experience in helping executors administer estates and we can do as much or as little as is needed. However, what we will do is to help you fulfil your responsibilities as tax efficiently as possible while ensuring that all your obligations to HMRC are met. Please do not hesitate to contact a member of the team to see how we can help you.
