A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.
Inheritance Tax & Relief for Falls in Value (Part 2)
In the current economic climate reliefs that reduce the amount of inheritance tax payable where assets have fallen in value may be of particular interest to taxpayers and their advisors.
Transfers on Death
Inheritance tax is generally calculated based on the value of the property at the date of death.
However, in some circumstances it may be possible to reduce the value on which inheritance tax is payable where the asset is later sold at a loss.
Where the claim is made, the base cost of the asset for capital gains tax purposes will be reduced to the new probate value so as to avoid the loss being relieved twice.
Sales of Listed Shares/Unit Trust Units
Where the personal representatives sell listed shares, units in an authorised unit trust or shares in an open ended investment company at a loss within 12 months of death a claim may be made to reduce the value that is subject to inheritance tax.
The claim will normally be made by the personal representatives (as the person liable for inheritance tax on the free estate) therefore the relief is unlikely to be available where the shares/units are distributed and later sold by the beneficiaries.
In the case of a trust in which the deceased had a qualifying interest in possession, there are provisions which permit the trustees to make a similar claim.
The relief is calculated in accordance with special rules and it is important to note that the amount of relief will be affected by:
- All sales (whether at a gain or loss) by the personal representatives/trustees in the 12 month period,
- Purchases by the personal representatives/trustees in the period commencing with the date of death and ending 2 months after the last sale in the 12 month period.
- Costs of sale and purchase are ignored
Sales of Land & Buildings
Where the personal representatives sell land at a loss within 4 years of death, a claim may be made to reduce the probate value for inheritance tax purposes.
Again, the relief is not available where the property has been appropriated to a beneficiary and later sold.
Furthermore, the relief is restricted where the sale is to certain connected parties with an interest in the property.
The amount of relief will be affected by:
- Sales at a loss by the personal representatives/trustees within 4 years of death,
- Sales at a gain by the personal representatives/trustees within 3 years of death,
- Profits and losses that are less than the lower of £1,500 or 5% of probate value are ignored.
- Purchases by the personal representatives/trustees in the period commencing with the date of death and ending 4 months after the last sale in the 3 year period.
Sales of ‘Related Property’
Where assets were valued using the related property rules and there is a sale at a loss within 3 years, a claim for relief may be made.
The relief is given by reducing the probate value to the standalone value of the asset at the date of death (i.e. ignoring the related property rules) and not to the sale value.