Inheritance tax: Falls in asset values
Donald Drysdale looks at inheritance tax reliefs that may be relevant when the values of assets have fallen after death.
The untimely demise on 9 August of Gerald Cavendish Grosvenor, 6th Duke of Westminster, whose wealth was estimated at around £9bn, encouraged some commentators to criticise what they see as the ‘voluntary’ nature of inheritance tax (IHT) because of the range of tax mitigation techniques available to the super-rich. But that is a highly-charged subject that I’ll leave for another day.
References in early obituaries to a reduction in the Duke’s wealth from movements in share prices following the EU referendum were later deleted because the stock market had bounced back. The position is complex, because the Brexit vote generated such a monumental geopolitical shock that some asset values have escalated whilst others have dropped. It will take a long time for things to settle down.
Current economic uncertainties make this an opportune moment for all practitioners to reflect on IHT reliefs that may be available when asset values have fallen shortly after death, and I’ll summarise them here.
Any non-exempt lifetime transfer will have been, at the time it was made, either a potentially exempt transfer (PET) or a transfer immediately chargeable to the lifetime rate of IHT.
A PET is not chargeable to IHT when it is made; it becomes chargeable (as a ‘failed PET’) if the transferor dies within seven years of the transfer, or exempt (as a ‘successful PET’) if he or she survives for seven years or more. Certain transfers or deemed transfers of value – most commonly transfers into trusts – are excluded from being PETs and are therefore immediately chargeable to IHT.
Following a death, in cases where there is a failed PET or an immediately chargeable transfer within the past seven years, IHT (or additional IHT) is likely to become payable (normally by the transferee) by reference to the value originally transferred. However, there are two ways a claim under Inheritance Tax Act 1984 (IHTA 1984) s 131(2(b)) may affect the valuation rules. Where all or part of the property gifted is still retained by the transferee (or their spouse or civil partner) at the time of the donor’s death and the ‘date of death value’ is lower than that originally gifted, such a claim allows the IHT to be calculated on that lower value. Alternatively, where all or part of the property gifted has since been the subject of an arm’s length sale at a lower sale price, this can be used.
Note, however, that this fall-in-value relief under IHTA 1984 s 131(2(b)) does not affect the IHT originally charged at lifetime rates on an immediately chargeable lifetime transfer, or the transferor’s cumulative total transfers for the purpose of calculating subsequent IHT charges. Furthermore, it doesn’t apply to chattels that are wasting assets.
Relief under s 131 must be claimed in writing within four years after death. Helpfully, it may be restricted to only part of the property in question; thus, if the original gift consisted of several assets or (say) a portfolio of shares, the relief may be claimed in respect of those that have fallen in value without regard to those that have increased in value.
Assets transferred on death
Land and buildings
Where, within four years after a death, the ‘appropriate persons’ paying IHT – usually the personal representatives – sell any interests in land that were part of the deceased’s estate, they may claim to calculate IHT using the gross sale price as though it were the value on death.
This claim under IHTA 1984 s191(1A) applies to all their sales of land within three years after death (whether at a gain or a loss), plus sales in the fourth year (at a loss) or (at any time) as a result of a compulsory purchase notice served before death or within the following three years.
Relief is restricted where sales are made to certain connected parties with interests in the property. Relief is also restricted by the net price of any purchases of land by the appropriate persons in the same capacity during the period from date of death until four months after the last sale in the three-year period.
No relief is due if the sale price differs from the value on death by a de minimis amount – namely, less than £1,000 or 5% of the value on death, whichever is lower. Where property was jointly owned at death, no discount is allowed in valuing the deceased’s share. Where land has been appropriated to a beneficiary and later sold, the relief is unavailable.
The relief must be claimed on HMRC’s Form IHT38 within seven years after death, or sometimes longer where there is compulsory purchase. HMRC won’t accept a claim signed by a tax agent. The claim is irrevocable, so it shouldn’t be lodged until all relevant facts are known.
There is a different relief for qualifying investments – namely, quoted shares and securities, unit trust holdings and UK gilts. Holdings in unlisted or AIM-listed companies and loan notes don’t qualify.
Where, within twelve months after a death, the ‘appropriate persons’ sell qualifying investments that were part of the deceased’s estate, they may claim to calculate IHT using the gross sale price as though it were the value on death.
This claim under IHTA 1984 s 179(2A) applies to all qualifying investments sold by the personal representatives during the twelve-month period (whether at a gain or a loss). Note that they may be able to maximise the relief by selling all loss-making qualifying investments within twelve months, while retaining for longer all those which have gained in value.
Special rules apply to changes in shareholdings between death and the date of sale. Relief is also restricted by the net price of any purchases of qualifying investments by the appropriate persons in the same capacity during the period from date of death until two months after the last sale in the twelve-month period.
Where investments have been appropriated to a beneficiary and later sold, the relief is unavailable. Investments given to a beneficiary (with their consent) to satisfy a pecuniary legacy will count as sold by the personal representatives, but only if they didn’t have power to do this without such consent.
The relief must be claimed on HMRC’s Form IHT35 within four years after death. HMRC won’t accept a claim signed by a tax agent. The claim is irrevocable, so it shouldn’t be submitted prematurely.
Where property in the deceased’s estate should be valued on death using the ‘related property’ rules (for example, by reference to other property owned by their spouse or civil partner) but is sold at a loss on an independent arm’s length sale within three years after death, a claim may be made to calculate IHT using a date of death value determined without reference to the related property.
Unlike the other reliefs I’ve mentioned, this claim under IHTA 1984 s 176 provides no protection against post-death falls in value because it doesn’t allow the IHT to be calculated on the sale price.
Article supplied by Taxing Words Ltd