By Peter Baxter, Chartered Wealth Manager at BRI Wealth Management
Where the present value may be lower than the probate value, it may be appropriate for executors and beneficiaries to consider the sale of the deceased’s investment portfolio rather than transferring assets. IHT share loss relief is a way of recalculating an estate’s Inheritance Tax bill in situations where the executors sell shares or investments at a loss within 12 months of the date of death.
The relief applies to all ‘qualifying’ investments. These are generally shares or securities listed on a recognised stock exchange and/or holdings in authorised unit trusts or their open-ended equivalent. To allow them to sell the investments, executors usually need to obtain a grant of probate which they can do once they have paid the initial Inheritance Tax bill.
Using form IHT35, executors/beneficiaries can then claim share loss relief by choosing to replace the value of the shares/investments at the date of death in the Inheritance Tax return with their actual value when sold. The executors or beneficiaries need to include all qualifying investments they have sold, not just the ones they sold at a loss. HMRC will then recalculate the IHT figure to reflect the new estate value and then repay the beneficiaries the excess tax amount.
Points to note:
- Anti-avoidance rule: There is a rule in place which forbids selling and repurchasing the shares within a two-month window. This is intended to stop people from selling the shares simply to create a loss, claiming the tax relief and then buying the same or different shares back again.
- Relief applies to net loss: The relief applies to the net loss on the sale of all investments within the twelve months since death. This means that if some investments were sold at a profit this will reduce the loss figure on which you can reclaim the IHT.
- Implications for Capital Gains Tax (CGT): If IHT is paid on an asset on death, usually there isn’t a Capital Gains Tax charge at the same time. However, when an IHT claim is made for a loss on the sale of the shares, the base cost for CGT will also be substituted for the market value of the shares when they were sold. This means that executors will not benefit from the loss twice.
- Effect on the Residence Nil Rate Band (RNRB): An IHT share loss relief claim will also reduce the value of the estate when calculating the available Residence Nil Rate Band (RNRB). The new, substituted value will be used to determine whether the threshold has been passed. This delivers a further potential tax benefit if some or all of the RNRB is reinstated.
