The stock market crash sparked by the coronavirus pandemic has significantly impacted the value of investment portfolios. Where someone died before the crash holding quoted shares and funds, their estate may have suffered IHT on an artificially inflated valuation.

Fortunately, executors can claim relief to recalculate IHT if they sell assets at a loss within 12 months of death. This guide explains how IHT loss relief works and when executors should make a claim.

The Executor’s Dilemma

Executors must normally pay IHT based on the value of assets at the date of death before probate can be granted. With markets down 30% or more since the start of 2020, assets may now be worth far less.

Although investors are advised to remain patient and wait for recovery, executors don’t have this luxury. They could pass assets directly to beneficiaries to sell when ready. But in doing so, they lose the chance to reclaim IHT at 40% and only save CGT at 10% or 20% later.

By contrast, executors selling loss-making assets can recalculate estate IHT. The proceeds, including reclaimed IHT, can then be distributed to beneficiaries to reinvest if desired.

This dilemma is more acute following the 2020 crash. Someone dying in early 2020 probably held assets at much higher valuations than today. Executors have 12 months from death to sell and claim IHT relief.

How IHT Loss Relief Works

Loss relief involves replacing asset values at death with actual sale proceeds in the IHT account and recalculating tax.

For example, Janice died on 7 January 2020 when markets were buoyant, leaving an estate of £1 million. This included a portfolio of funds worth £600,000 at death but now worth £400,000.

Having settled the initial £400,000 IHT bill, her executors sell the funds, realising £400,000. They can now elect to rewrite the IHT account, substituting the £600,000 death value with the £400,000 sale proceeds.

IHT is recalculated on the lower estate value, generating a £80,000 refund (40% of the £200,000 loss).

Comparing IHT and CGT Savings

Typically, IHT exceeds CGT, so claiming loss relief produces greater savings. CGT on shares is only 10% or 20% for basic and higher-rate taxpayers.

Where no IHT is due, executors may prefer to use losses to reduce CGT on other estate assets or pass shares to beneficiaries at the (higher) death value to realise gains tax-free later.

However, the 40% IHT savings will usually outweigh CGT savings. Claiming loss relief also lowers the estate value for residence nil rate band purposes, potentially reinstating taper relief.

Amending the Base Cost for CGT

Claiming IHT loss relief also reduces the base cost of assets for CGT purposes. So, if executors later sell assets that have gone up in value, the same losses cannot be used again to reduce CGT payable.

Mixing and Matching Assets : To maximise relief, executors can selectively sell loss-making assets within 12 months and transfer assets showing a gain to beneficiaries. There are provisions against quickly buying back the same assets.

The Rules : Several conditions apply for loss relief claims:

• Assets must be qualifying quoted shares or authorised unit trusts/OEICs. Not unlisted shares or AIM stocks.
• Executors must sell within 12 months of death. Suspended shares are treated as sold at the suspension value if still suspended after 12 months.
• Claims must be made within five years of death using IHT35.
• The executors or trustees liable for IHT must conduct the sale.
• Transferring assets to beneficiaries in exchange for fixed legacy counts, not residue transfers.

Strategic Use of Loss Relief

Executors managing estates impacted by the 2020 stock market crash should consider loss relief. IHT savings often outweigh eventual CGT liabilities.

Selectively realising losses within 12 months and transferring any gainers to beneficiaries can optimise tax savings. With volatile markets, reviewing options before the 12-month deadline is key to ensuring this relief opportunity is noticed.