Losses – what a relief! Shares, land, lifetime gifts and personal possessions
A year ago the FTSE 100 was hovering around 7,500. On 23 April it was just above three quarters of that, having fallen to below 5,000 on the day, exactly one month earlier, the prime minister announced the lockdown and following an upward, if bumpy, trend since then. The property market has largely ground to a halt so it is impossible to predict what will happen to house prices but commentators are expecting prices to fall back before recovering in 2021.
The days of the ‘Boris bounce’ seem to be long gone, but for those who are administering estates the fall in value will be particularly keenly felt because inheritance tax will have been paid on the date of death values. There are, however, some reliefs which may ease the situation but they do not apply to all assets and the rules which apply depend on the nature of the asset.
Loss relief for shares
If qualifying investments (ie quoted shares, gilts and unit trusts but not AIM stocks) are sold by the executors within a year of death and there is a net loss when the sale price is compared with the probate value, inheritance tax loss relief can be claimed. Inheritance tax is then paid on the gross sale proceeds rather than the probate value. All sales made within the year of death must be taken into account when the relief is calculated. The relief is restricted if purchases have been made by the executors.
It is important to note that the sales must be made by the persons liable for paying the tax, usually the executors, so the executors will want to consult with the beneficiaries about whether assets should be sold or transferred to them. There may be tax planning opportunities if the executors sell investments standing at a loss but distribute those standing at a gain.
Loss relief for land
Loss relief is also available for sales of land. The period in which the sale must take place is longer – four years – but again the sale must be by the persons liable for paying the tax which may delay completing the administration of the estate. As with shares, all sales of land by the executors must be taken together when the relief is claimed.
Relief for failed potentially exempt transfers (PETs)
Relief is also available for inheritance tax payable on assets which are the subject of a failed potentially exempt transfer if their value at the donor’s death is or the proceeds of sale are lower than at the date of the gift.
No statutory reliefs are available for assets such as personal possessions but HMRC usually accepts the sale price as the best indication of the date of death value, so in practice there may be an informal loss relief available.
The exceptional circumstances in which we find ourselves present many challenges for executors and obtaining good advice on tax and practical issues will be essential.