We do not yet know the full extent of the economic impact of the COVID-19 pandemic, but all the signs are that effects will be worse than 2008 and any other downturn in living memory.
Given this, we thought it would be useful to highlight a little known inheritance tax relief that (unfortunately) may be relevant over the coming months and years.
Where an individual dies owning “qualifying investments” (primarily listed shares) or land that is subsequently sold at a loss, it is possible to apply to HMRC to substitute the sale value for the value at the date of death, thereby reducing the tax payable. To take a simple example:
- Mary died in January 2020 owning a share portfolio worth £100,000, on which inheritance tax of £40,000 was paid.
- Her executors sell all of the shares for £75,000 before the first anniversary of Mary’s death.
- Mary’s executors apply to HMRC (using form IHT35) to claim a reduction in the value of her taxable estate, thereby ensuring an IHT saving of £10,000 (i.e. 40% of £25,000).
The relief does not apply forever: sales of qualifying investments must take place within the first year of death, whereas the period for sales of land is more generous as it can be up to four years from the date of death. Executors should therefore keep these deadlines in mind. For example, it may be prudent for them to review all the deceased’s investments in the weeks leading up to the first anniversary of death and consider selling any that have reduced in value.
As is often the case with inheritance tax, while the theory behind the relief is straightforward, the legislation itself is complicated and there are various traps for the unwary.
Please get in touch with your normal Turcan Connell contact if there is anything we can help with. Alternatively, please email us at email@example.com.