In recent weeks, the coronavirus pandemic has caused huge volatility in global stock markets. Between 6th February and 5th May, the FTSE 100 index fell by around 22%, and other markets around the world have seen similar turmoil.
With many shares now worth significantly less than they were a month or two ago, some heirs could have paid more Inheritance Tax (IHT) than necessary. As IHT is calculated on the value of assets on the date of death, subsequent falls in that value could enable trustees or legal representatives to reclaim some of the IHT that they paid. Using this relief, IHT can be reclaimed where shares, or other qualifying investments left on death, are sold by the appropriate person(s) within 12 months of death at a lower value than that on death.
However, it’s important to consider the pros and cons of claiming a refund, as a claim will involve selling shares and locking in potential losses. Here’s your complete guide.
IHT relief could be available when the value of investments falls after death
Considering the significant reduction in the value of many portfolios in recent weeks, there has been some discussion about the possibility of reclaiming IHT based on ‘new’ equity values.
This has been particularly relevant recently following global stock market volatility.
For relief to be available, the holdings must be ‘qualifying investments’ which include:
- Quoted shares and securities, listed on a recognised stock exchange at the date of death
- UK gilts
- Holdings in unit trusts and other collective investments.
‘Qualifying investments’ don’t include holdings in unlisted companies, AIM-listed companies (both of which may qualify for IHT business relief) or loan notes.
To reclaim overpaid IHT, the inherited investments must be sold within 12 months of the testator’s death by an ‘appropriate person’ - usually the legal personal representatives.
In theory, recalculating the IHT can help an estate to reduce the amount of IHT (payable at 40%) by the amount the shares have devalued by. However, there are some issues to bear in mind.
Firstly, the shares must be sold within 12 months. This means that if markets remain volatile, an individual could lock in a loss by selling, when the value of the shares may recover in time.
Additionally, any claim must include sales of all qualifying investments if relief is to be obtained, not just the investments which have fallen in value. HMRC will not allow an individual to select the shares which have sold for a loss, to claim an IHT refund.
Individuals also have to be careful not to breach anti-avoidance rules by repurchasing shares within a two-month time period.
How to claim the relief
The relief must be claimed on Form IHT35, which must be signed by all the appropriate persons, within five years of the date of death. However, it’s possible to claim provisional relief within 12 months of the date of death. If HMRC give provisional relief, they may review it later.
It is strongly advisable to speak to a accountant or tax specialist before claiming this relief.
Gifting shares while values have fallen
At a time where investment values have fallen, now may also be a good time to consider making gifts of investments as part of an IHT planning strategy.
Every individual can gift up to £3,000 in a year free of inheritance tax (so £6,000 for a couple). If an individual hasn’t used the previous year’s gifting allowance, they can use double in one year, so £12,000 for a couple.
Considering investment values have fallen, now may be a good time to make these gifts.
Note that, unlike transfers to spouses which are free of Capital Gains Tax (CGT), any shares handed to children will be classed as a disposal for CGT purposes. This means that an individual could face a tax bill for gifting the shares.
Get in touch
If you would benefit from estate planning advice, we can help. To find out more, email firstname.lastname@example.org or call (01285) 649200.
This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Ermin Fosse’s services.
Please contact us before you invest / disinvest. The past is not indicative of future results. When you invest you may not get back what you put in. Errors and omissions excepted.
Ermin Fosse Financial Management LLP is authorised and regulated by the Financial Conduct Authority Financial Services Register No: 197438