The past few months have seen the values of stocks and shares fluctuate quite dramatically. This can have an adverse effect on estates and the amount of inheritance tax (IHT) that is paid.
An increasing number of executors choose to administer estates without the benefit of professional advice and therefore may be unaware of the relief that is available to assist or if they are aware of the relief may not take full advantage of it.
The General Rule | Shares
The assets within an estate are valued as at the date of the owner’s death and the IHT payable is based upon that value.
However, it is likely to be several weeks if not months before the executors of an estate are in a position to deal with transferring or selling shares that belonged to the deceased. They will normally have to wait until they have obtained the grant of probate.
In the intervening period of time there is the possibility that those shares may fall in value. The result therefore is that the value that the beneficiaries receive when the shares are sold is significantly less than the value on which the IHT has been paid.
There is a relief available to executors and trustees of trusts in which the deceased person had a life interest, which enables them to substitute the actual sale price of shares sold following a death with the actual value as at the date of death for IHT calculation purposes and thus recover the difference in the IHT had already been paid.
There are however some strict rules which govern how this relief is applied such as:
- The shares must have been sold within twelve months of the death.
- Not all shares qualify for the relief although most shares quoted on stock markets and unit trusts do qualify.
- The shares must have been sold by the appropriate person – usually the executor of the estate.
- The claim for relief must be made within four years of the end of the twelve-month period from the date of death.
- All sales of qualifying investments that occur during the twelve-month period following the date of death must be included in the claim for relief whether those sales were all made at a loss or not.
There are a number of traps into which the unwary can fall which may result in the relief being limited or not being available at all. These include for example not making the claim within the relevant period or not completing the sale of the shares within twelve-months of the date of death.
It is also important to bear in mind that if shares that have fallen in value are transferred to a beneficiary who then sells them that the relief is no longer available.
The claim for relief must also take into account the sale of all qualifying investments that are made during the twelve-month period. Therefore, if some shares are sold at a gain and others are sold at a loss the sale price of all of those shares whether sold at a profit or loss are substituted for the original probate values for IHT calculation purposes. The result therefore is that whilst the IHT paid on those shares sold for a loss is reduced the IHT paid on those sold at a gain is increased! Therefore, whenever an estate holds shares it is important to take advice and to plan carefully how and when those sales or transferred to beneficiaries particularly during times of falling stock market prices.
Any executor who requires further advice on this relief and whether it would apply to an estate that they are administering should contact the private client team of Stephens Scown who have offices in Exeter and Truro.