Kevin Read explains how personal representatives can save inheritance tax where quoted investments or land have lost value.
Where people act as personal representatives (PRs) for those who died in the months leading up to the coronavirus pandemic, there is a good chance that they will be realising assets for less than their value at death.
Where the asset is quoted investments or land and buildings, the value of the death estate for inheritance tax (IHT) purposes may be adjusted for losses arising on post-death disposals. However, the detailed rules are quite tricky, particularly where losses are restricted due to the PRs reinvesting in the same type of asset while administering the estate.
Quoted investments
All sales within the twelve months after death are considered, whether generating a profit or loss, which is calculated by a simple comparison between the probate value and the gross sale proceeds.
Purely from an IHT perspective, it is therefore best to sell loss-making shares within twelve months of death but to delay the sale of those that have risen in value until the twelve months have passed (as the profit will be ignored and won’t reduce a loss on other shares sold).
Where there is any investment in quoted investments by the PRs from the date of death (in practice, from when the grant of probate is obtained) until two months after the last disposal within the twelve months, any loss calculated on disposals is restricted by the formula:
Cost of new investments × Loss
Total gross proceeds from sales
Note the timing rule; if death was on 1 January 2020 and the last disposal within the following twelve months was on 15 December 2020, reinvestment up until 14 February 2021 would be relevant. However, if the last disposal was on 22 August 2020, it would only be acquisitions up until 21 October 2020 that would be relevant.
Any allowable loss can be deducted from the probate value in the death estate, so that an IHT repayment may be generated. This is done by filing form IHT35 within five years of death.
Sometimes quoted investments get suspended from being traded on a stock exchange. PRs may deem such shares to be sold for their suspended value twelve months after death, thus potentially allowing a loss to be generated without an actual disposal.
Note that this relief does not apply to unquoted investments, which for these purposes include those listed on the alternative investment market.
Land and buildings
These rules work in a similar way to the rules for quoted investments, with the following differences:
- All sales within three years of death must be considered, plus any sales at a loss in the fourth year.
- You must ignore any sale completely where the profit or loss is ‘small’, being the lower of £1,000 or 5% of probate value. Note that there is no equivalent rule for quoted shares.
- When considering any restriction of the loss, only consider purchases from the date of death until four months after the last sale within the three year period (even where there has been a loss-making disposal in the fourth year).
- The PRs can make a claim for an IHT repayment for an allowable loss by filing a form IHT38 within seven years of the date of death.
Practical tip
Where PRs are intending to dispose of quoted investments or land (rather than appoint them out to beneficiaries), it is sensible IHT planning to advance the sale of those showing a loss, and to delay the sale of those showing a profit. However, other non-tax factors may influence the timing of disposals.
