How to use Inheritance Tax Loss Relief to reclaim IHT after a stock market fall
In recent years, as asset prices have marched higher, Inheritance Tax Loss Relief has generally been overlooked.
However, at times of volatility in global stock and bond markets, such as we have seen this year, it is definitely a subject that is worth revisiting.
What is Inheritance Tax Loss Relief?
Inheritance Tax (IHT) is paid based on the value of an estate at the date of death.
In cases where the deceased dies before a market downturn, the value of any shares or funds that they held is likely to have decreased since that date.
As a result, the IHT bill may be markedly higher than it would have been had it been calculated based on values after the market drop.
Inheritance Tax Loss Relief provides a way for executors and beneficiaries to recoup some of the IHT that has been paid in order to reflect the loss caused by such a market downturn.
How does Inheritance Tax Loss Relief work?
Inheritance tax relief can be used with listed investments such as shares and funds or with property.
Shares and funds
The relief can be claimed by replacing the value of the shares or funds at the date of death with their actual value when sold.
HMRC will then recalculate the IHT figure to reflect the new value and then repay the beneficiaries any excess amount.
The relief applies to investments that have been sold within 12 months of the date of death.
In addition, it must be claimed within 5 years of the date of death.
Finally, it should be noted that it applies to the “net” loss on the sale of all investments within the 12 months since the date of death. I.e. If 2 investments were sold, with one making a £50,000 loss and the other a £25,000 gain, then the amount that could receive relief would be £25,000.
Property
A claim for Inheritance Tax Loss Relief for land and property can be made for sales within 4 years of the date of death.
As with the sale of shares or funds, HMRC will consider all property/land sales by the estate within the 4 year period and base the relief on the net loss.
The relief for land and property must be claimed within 7 years of death.
Effect on the Residence Nil Rate Band (RNRB)
The RNRB is reduced by £1 for every £2 of value by which an estate exceeds the current threshold of £2 million.
Ultimately, tapering can reduce the RNRB to zero.
Inheritance tax loss relief can reduce the value of an estate when determining the available RNRB and thus potentially allow for some or even all of it to be reinstated.
Summary
For those dealing with the estates of individuals that have died, minimising the amount of IHT paid is very important.
Executors will want to ensure that they are aware of the possibility of using any Inheritance Tax Loss Relief that is available.
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Talk to an Expert
Ross is a qualified Chartered Financial Planner and Pension Transfer Specialist.
He has been a cross-border financial adviser for 25 years and specialises in helping British expats manage their finances with clarity and peace of mind.
If you would like to have a no strings chat with him, please get in touch.
