The effects of COVID-19 have caused markets to be volatile and this has affected the value of investment portfolios and shareholdings. Loss on sale of shares relief (IHTA84 S178-198) (“loss relief”) is therefore a particularly relevant relief in the current climate. The loss in value of investment portfolios and shareholdings may also have impact on the calculation of legal rights in Scotland (Succession (Scotland) Act 1964).
There will be a number of cases in respect of recent deaths where the date of death value of investment portfolios was a great deal higher than they are currently. Where inheritance tax (IHT) has been paid in respect of the date of death value, loss relief could be used to deduct the loss on sale from the date of death value and IHT would then be charged on the lower amount.
Loss relief is not an automatic relief and it must be claimed within 5 years from the date of death. In summary, the loss relief allows for the sale price of the sold shares to be substituted for their date of death values subject to certain conditions being met, namely:-
- The shares sold must be ‘qualifying investments’, for example, listed shares and securities, and unit trusts etc. Unlisted shares and shared traded on the Alternative Investment Market (AIM) are not ‘qualifying investments’.
- The sales must be within 12 months of death.
- The shares must be sold by the ‘appropriate person’ i.e. the person who is liable for the tax, usually the Executors (or the trustees of a trust in the case of a pre March 2006 interest in possession trust).
- There must have been an overall loss on the sales of the qualifying investments.
It should be noted that all sales within the 12 month period must be included in the claim whether or not a loss is incurred. This means that any gains will therefore reduce the overall relief and it may be possible to minimise the total tax payable by deferring sales at a gain until after 12 months of the date of death.
Loss relief is only available in respect of the sale of a shareholding and if the Executors have transferred shares in specie to a beneficiary and they then sell the shares, the relief will not be available. The beneficiary will receive the shares at the date of death value and any sales will be made by them as an individual, meaning that any gain or loss would be reportable by them directly.
Loss relief is restricted if any shares are purchased by the appropriate person between the date of death and the end of 2 months after the last sale within the 12 month period. The loss is restricted by the fraction of the total of the purchase prices over the total price sales.
In the current climate Executors should be carefully considering loss relief and although obtaining the relief should not be the main factor in making the sales it is a valuable relief to consider in terms of overall planning.
In providing a value for legal rights, Executors should provide a calculation based on the value of the moveable estate as at the deceased’s date of death. Interest accrues from the date of death to the date of payment. The rate of interest is not fixed, it is what the sum earned or could have earned by prudent management.
Legal rights are rights to the payment of a sum calculated on the value of the net moveable estate, and not to a particular asset. However, if all the beneficiaries are in agreement, assets can be made over to a claimant in satisfaction of legal rights.
Potential claimants have 20 years from the date of death to claim their legal rights and during the course of the executry administration the value of the moveable estate can fluctuate.
If any moveable property is realised during the executry administration period, the Executors may need to provide a revised calculation of legal rights to potential claimants if the values differ from the date of death values. Legal rights claimants are entitled to a share of the realised value of the moveable estate and in some cases they may wait to decide whether to claim their legal rights or not, once all moveable assets that are being realised have been realised.
In the current climate due to the volatile markets, Executors could face difficulty when liaising with potential legal rights claimants in respect of calculations where, for example, the date of death value of an investment portfolio is substantially higher than the current value.
The value of an asset for the purposes of legal rights is normally the date of death value. However, case law has confirmed that if the estate is reduced to a cash sum by realisation of assets during the executry administration period without any undue delay, the realised value will be the value for the purpose of legal rights.
In the case of Alexander v Alexander’s Trs 1954 S.C. 436 the widow and children of a testator elected to claim their legal rights in place of their testamentary provisions. Without any fault of the testator’s executors, the realised value of his moveable estate proved to be substantially less that its value as estimated for estate duty purposes. It was held that, although the jus relictae and legitim fell to be valued as at the date of the testator’s death, their values, as there had been realisation in the ordinary course, fell to be determined by reference to the realised value of the moveable estate and not by its estimated value.
The case of Milne v Milne’s Trustees 1931 S.L.T. 336 involved the trustees selling a business on credit terms and there was a loss on the realisation resulting from failure of the purchaser to pay the whole price. The trustees then deducted the amount of the loss from the valuation in assessing the jus relictae which was objected by the widow. It was held that in a case of such purchase and sale the loss was rightly debited against the moveable estate in ascertaining the jus relictae.
Executors should be aware of difficulties that may arise where legal rights claimants challenge whether the appropriate action was taken by the Executors, if assets were realised at a loss in comparison with date of death value. There could be a great number of factors to be taken into account here however Executors should be able to show that the assets in the estate were being managed prudently and in the case of investments, that investment advice was being sought, particularly in respect of timing of realisation.