Don’t overlook fall in value relief for shares

Administration period

Inheritance tax (IHT) is paid based on the value of assets on the date of death, i.e. the probate value. Because the administration of an estate takes time, it’s sometimes necessary for the executors or personal representatives to sell assets, for example to cover costs of dealing with the administration, especially if there is little to no cash. Sadly, more and more people are being caught up in the IHT net due to being asset rich but cash poor. Where this happens, it’s usually easier to dispose of assets that are easy to sell. For example, it makes more sense from an administration perspective to sell listed shares or securities instead of property, particularly given the effect of coronavirus over the last eighteen months.

The relief

Fall in value relief is available where IHT has been paid, but qualifying shares have later been sold out of the estate for less than the probate value. It will also apply where a company has failed and the securities have been cancelled, i.e. where there is no actual disposal. This works by deeming there to be a disposal at a nominal consideration of £1.

The relief can only apply to sales of listed shares or securities, UK government stock or unit trust holdings sold within twelve months of death. The sale must be made out of the estate before distribution - a sale by a beneficiary after they have taken ownership doesn’t count.

Any loss must be aggregated with gains made on other qualifying investments, i.e. it’s not possible to cherry-pick losses. However, it is possible to review the value of qualifying investments and be selective about which ones to sell. It's good practice to do this shortly before the first anniversary of a death.

IIt order to claim the relief, an IHT35 claim form must be completed. The executors must sign this - an advisor cannot do it on their behalf.

Anti-avoidance

At first glance, it might be tempting to undertake an exercise to identify shares standing at a loss after death, sell them before the first anniversary to crystallise this and then buy the shares back. However, if the repurchase takes place within two months the tactic will be ineffective. This restriction applies to any purchase of qualifying shares, i.e. they don’t need to be from the same company for the anti-avoidance measure to bite.