Wealthy seek inheritance tax rebates

Britain’s wealthiest families could be entitled to a rebate on inheritance tax (IHT) bills if they inherited share portfolios or properties in the year leading up to the coronavirus market plunge, advisers predict.

Under a little-known tax rule, executors are able to apply for IHT refunds on losses made on the sale of inherited securities within 12 months of an individual’s death. The relief applies to listed shares, gilts and unit trusts but not unlisted or Aim-traded shares.

The Covid-19 pandemic has roiled markets causing the biggest quarterly fall in global stock prices since the 2008 financial crisis.

Advisers at NFU Mutual expect a spate of interest in the rule from clients and anticipate the number of requests this tax year will far outstrip the 1,403 IHT reclaim requests made to HMRC in the 2018-19 tax year.

“There could be many families out there able to reclaim thousands of pounds in inheritance tax following the recent slump in the stock market,” said Sean McCann, chartered financial planner at NFU Mutual.

“We saw a spike in the number of IHT reclaims due to falling share prices during the financial crisis in 2008/09. I’d expect to see a similar increase following the large falls we’ve seen as a result of coronavirus.”

Although selling inherited shares would crystallise losses, the ability to use these to reclaim tax could appeal to families depending on their financial circumstances, lawyers say.

Inheritance tax is charged on the value of an individual’s assets at death and must normally be paid within six months before the estate can be formally handed over to the family. 

The tax is charged at 40 per cent for individual estates greater than the tax-free threshold of £325,000. Married couples and those in civil partnerships are able to combine their allowances and use the residential nil-rate band if a family home is passed down. 

Wilsons, a private client law firm, said a £1m portfolio of shares inherited last year near the stock market peak was likely to have incurred an IHT bill of about £270,000.

Assuming the portfolio had halved in value to £500,000 during the market crash, Wilsons said selling within a year of the date of death would trigger a rebate that would lower the IHT bill to just £70,000.

“Solicitors advising clients who have inherited shares should be highlighting this [rule] to them,” said Rupert Wilkinson, partner at Wilsons. “The real problem comes with DIY probates where there is limited knowledge of the way inheritance tax works — there is no solicitor involved so [there is] nobody to advise the heirs that on a sale they can reclaim substantial amounts of overpaid tax.”

In order to claim this relief, executors will need to fill out an IHT35 form. However, they should bear in mind the reference point the tax office uses to calculate losses is the whole of the share portfolio, not just individual shares that are now trading at a loss. If some shares or unit trusts have risen, all the sales are aggregated.

“If some of the shares sold have gone up in value since death, this will reduce the amount of IHT that can be reclaimed,” said Mr McCann. “To get around this, the executor could assign the shares that have gone up in value to the beneficiaries and only sell the shares that have gone down in value.”

Meanwhile, a similar rule allows executors who sell a property for a lower value within four years of the death to claim an IHT rebate by filling out an IHT38 form.

Lynne Rowland, partner at accountancy firm Moore Kingston Smith, urged executors dealing with estates holding shares and property which have now fallen in value to be mindful of the reliefs on offer.

“Overlooking a potential refund of IHT could leave [executors] open to challenge by beneficiaries who are entitled to make a personal claim for redress if the executor is perceived not to be discharging their legal obligations in full,” she added. 

Last year, IHT receipts in the UK hit a record high of £5.4bn.