In an environment in which property values are falling in some parts of the country and stock markets are volatile due to world events and economic uncertainty, it is not uncommon for assets which have been valued for probate purposes on their owner’s death to be sold subsequently by the estate’s Executors at a lower value. For example, losses could arise if there have been delays in obtaining the grant of probate, during which time the value of the assets included in the death estate has fallen to a figure which is lower than the date of death valuation.
Fortunately, if inheritance tax (IHT) has already been paid on the higher probate value, it may be possible to obtain an IHT refund in certain circumstances. The criteria for claiming the relief are outlined below.
Land and buildings
IHT relief is available where the personal representatives (PRs) make sales of land/buildings at less than probate value within a specified period from the date of death. All sales of land & buildings made within the period of 3 years from the date of death must be taken into account. In other words, IHT relief can only be claimed when losses on land & building sales in the entire 3 year period exceed gains in the same period. Furthermore, sales at a loss in year 4 can also be included in the calculation, but gains in year 4 can be ignored.
For example, the Executors of A sell two properties within a 3 year period of A’s death, one at a gain of £15,000 and the other at a loss of £50,000. A refund of up to £14,000 (40% of £35,000) may be available depending on the IHT rate paid on the initial IHT submission.
A restriction is applied to the relief in circumstances where the PRs also purchase property in the period commencing with death and ending 4 months after the last sale included in the claim. An adjustment would also be made to the relief if there is a change in circumstances arising after the date of death which affects the property value, for example, withdrawal of planning consent which existed at the date of death.
Understandably, the relief is not available where the property is sold to a beneficiary of the estate, or a person/trust connected with a beneficiary; this is to prevent deliberate sales at an undervalue.
It is interesting to note that there is no equivalent process to substitute a higher probate value where a property has been sold at more than its probate value. It would be tempting to do this where, say, a property has been free of IHT for some reason and a higher value would increase the base cost at which the beneficiary inherits the property, thereby reducing their potential capital gains tax bill on a subsequent sale in their own name. HMRC’s view of this situation is that, given no IHT is payable, there is no person entitled to make the claim.
Listed shares and securities
A similar relief is available when the PRs sell quoted securities (generally, shares and authorised unit trusts) in the 12 months following death, at an amount less than they were valued in the death estate. Again, all quoted share sales in the 12-month period must be included in the calculation; only if the result is an overall net loss can an IHT refund be claimed. PRs may therefore wish to consider deferring the sale of shares standing at a gain until after the initial 12-month period has passed.
Losses on unquoted shares and AIM-listed shares are excluded from the calculation and relief is not given for the costs associated with the sale. In other words, it is the gross sale proceeds which must be compared to the probate value in making the calculation.
Again, restrictions to the relief apply where the PRs purchase quoted shares in the period between the date of death and 2 months after the last sale included in the claim.
In summary, these are complex but useful reliefs; we would encourage Executors and their legal advisers to contact us for a comprehensive review of individual circumstances before relying on the availability of these reliefs.