Inheritance tax (IHT) is always a touchy subject and often ignored. It is difficult enough dealing with an anticipated or even actual loss of a family member, but what happens when it transpires that the loss is reflected financially, too?
If securities or land and houses are sold at a loss to the probate valuation during the course of an estate’s administration, it is possible to substitute those lower gross sale proceeds for the probate valuation – providing the rules set out in sections 178 to 189 of the Inheritance Tax Act 1984 (“the Act”) (for securities) and 190-198 of the Act (for land) are observed.
Where IHT is payable, the successful use of these reliefs will obtain an appropriate refund of that IHT for the estate. A key point to remember is that these reliefs should be considered proactively at the beginning of the administration of every IHT-paying estate that contains shares or property. Depending on market movements, a good adviser can plan to use the reliefs, although in practice this does not happen often: usually the reliefs are thrown into consideration after estate accounts have been prepared.
If the reliefs are not considered by professional advisers, HMRC does not volunteer their availability. The IHT manual at paragraph 34032 states, “Generally you should leave it to the taxpayers to decide whether they wish to make a claim. But you should bring the relief to the attention of personal applicants and send them a copy of IHT 35 if you become aware that shares are being sold.”
Background to the reliefs
In the early 1970s the death tax applicable was estate duty. Between 16 April 1969 and 30 March 1971 estate duty was applied to taxable estates in slices up to an 85 per cent rate. By statutory concession the estate rate – the percentage of the estate that was paid in estate duty – could not exceed 80 per cent: this cut in for an estate that exceeded £2,057,500. From 22 March 1972 up until 12 November 1974 the rates had slightly reduced to a top slice of 75 per cent for that part of the estate exceeding £500,000.
It was not unusual to see estates that had an estate rate above 70 per cent. As today, the estate duty had to be paid before the grant of probate could be issued. Unlike today, it was very difficult to get monies released to pay that estate duty before the grant of probate was available. The solution was for the executors to borrow the money needed from a bank and repay it when the grant was available to make title to, and liquidate, assets.
