While lockdown measures are now easing, the impact of the market instability caused by Covid-19 is expected to be with us for the foreseeable future.
For those advising the executors of a deceased client, market fluctuation like this can create additional challenges during an already sensitive time.
Inheritance Tax (IHT) must be paid on an estate’s value at the date of death, even if the value of the estate’s assets then proceed to drop on the back of a market downturn.
If the affected assets are then sold, the beneficiary’s loss is compounded by an IHT bill that ignored the asset’s adjusted value.
This scenario is more likely in the climate created by the Covid -19 pandemic.
Last year, the FTSE 100 Index was consistently above the 7,000-point mark until the end of February 2020.
Since then, share values have dropped by over 33 per cent and, at the time of writing, the Index is sitting around 6000.
There is a relief designed to help executors affected by this issue recover IHT they have already paid.
IHT share loss relief lets an executor recalculate their IHT bill if they sold quoted stocks and shares or collective investments at a loss during the period they were administrating the deceased party’s estate.
But executors face a dilemma.
Relief is only available when executors sell shares and pay the cash proceeds to the beneficiary.
There is generally no relief available if the executors pass the shares to the beneficiaries.
The best course of action during a market downturn is often to hold tight and wait for the markets to recover, but executors might still decide to pass the shares to the beneficiary and allow them to choose the best time to sell.
This approach has its advantages. If the shares’ value hasn’t recovered by the time the beneficiary sells them, any losses can be carried-forward to offset tax for future capital gains.
But, if the executor sells the shares, the proceeds, plus any reclaimed IHT, can be passed on to the beneficiary for them to reinvest however they wish – which in most cases is a more tax efficient outcome.
How the relief works
Before they can sell shares, executors need a grant of probate, which they cannot obtain until IHT is paid.
Relief on the sale of quoted shares is then claimed by replacing their value at the date of death in the IHT account with the actual sales value.
IHT is recalculated on the lower value of the estate, and a repayment of IHT will follow.
For example, Janice, a widow, died on 7 January. Her will leaves an amount up to the nil rate band into a discretionary trust and the residue of her estate after IHT is split equally between her nephew Tom and niece Evie.