Article curated by Assistant Manager Conor McManus
Given the current global economic climate, paired with the current UK political uncertainty, the UK economy is expected to enter a period of recession with an associated depreciation in asset values; as we have already seen for most stocks and shares.
During these bleak times, it is important to consider tax reliefs and planning strategies that are available in these circumstances.
This article is focused on the support available to Executors of the estates for a loved one who has already passed, and the actions individuals can take now over their own personal affairs.
Probate and executors
Post Mortem Reliefs
The probate team here at Menzies have reserved legal powers such that we are able to assist and advise families at the time when they need us the most. As part of the probate process and for many of the executors we are working with at present Post Mortem Reliefs have been shown as relevant. There are a number of reliefs available to an individual’s estate, after the date of death. The reliefs are available where certain assets have reduced in value since the date of death. If the reliefs apply, and are claimed, the new values are substituted into the individual’s estate and an inheritance tax (IHT) saving of up to 40% is made.
Post Mortem Relief can be applied to the following assets:
Quoted Shares or Securities
If quoted shares or securities are sold within 12 months of the date of death, and an overall loss has been made in that period, the total proceeds of all sales may be substituted into the estate, to amend the inheritance tax calculation. It is important to note that all sales must be taken into account in the 12 month period, including sales which resulted in a gain. Only if the overall sales result in a loss can the relief be claimed.
Please note that if the executors of the estate purchase any new shares this will impact the calculation and restrict the value that can be substituted into the estate.
The earliest a claim can be made is 12 months from the date of death. This is because all sales within 12 months of the date of death must be accounted for.
Land and Buildings
The mechanics of the relief works much the same as for quoted shares or securities. The key difference is that the period covers 3 years from the date of death rather than 12 months. All sales made by the executors in the 3 years following the date of death are aggregated together and if this results in a loss, the figures can be substituted into the inheritance tax return. There is a special rule which allows losses to be counted for sales in the 4th year since death, however any property sold at a gain will not be counted. The relief therefore is effectively extended to 4 years rather than just 3. It is important to note that any sales resulting in gains or losses that are under the lower of; £1,000 or 5% of the probate value, will not be counted towards calculating the available relief.
As with quoted shares and securities, any purchase of property will restrict the value of the claim.
The earliest a claim can be made is 4 months from the final sale of property in the estate, although in certain circumstances HMRC will accept a smaller time frame. It must be stated that no further property sales will be made.
It is important to consider that on the sale of property, if inheritance tax was been paid in instalments on the asset, all the inheritance will become payable.
Assets valued in conjunction with other assets
The relief can only be claimed if the following 3 conditions are satisfied;
The executor sells an asset which was valued with other assets for IHT purposes.
The asset must be sold within 3 years from the date of death to an unconnected person.
The gross proceeds received on sale must be less than the amount charged to IHT.
If all three conditions are met, a post mortem relief claim can be made.
The relief is actioned by removing the value of the asset from the inheritance tax return and replacing it with the stand-alone value. Where the stand-alone value is the value of the asset at the date of death, ignoring the related properties rule. This may be applicable where individuals have controlling share holdings in family companies for example.
An important point to note is that the value the asset is sold for is irrelevant as long as it falls below the amount originally charged to IHT.
The role of the executor
In all the reliefs described above, it is important to note that only the executors of the estate can make a claim for these reliefs. If the assets are distributed and the beneficiaries subsequently sell the assets at a loss the estate will not benefit, instead the beneficiaries will claim a personal loss for Capital Gains Tax purposes. Given the 40% rate of inheritance tax it is worth carefully considering what action to take with assets that are currently valued for less than at the date of death.
If a post mortem relief claim is made, the beneficiaries will take on the new, substituted value, of the assets as the base cost going forward. This will impact on their Capital Gains Tax position on future disposals of the assets.
Given the fall in value of the economy it may be that estates, currently in administration, could benefit from the above post mortem reliefs.