Professional Adviser June 2009
IHT Planning – losses on shares and a trust planning idea
There are occasions when inheritance tax comes to the fore. The most common
example is following the death of an elderly relative. Quite often a younger family
member will be given the responsibility of administering the deceased’s estate as their
personal representative and will also be named in the Will as a beneficiary.
We will look at one simple relief that a personal representative could claim if the
estate comprises shares and one simple inheritance tax trust planning idea of how to
mitigate an ongoing inheritance tax charge.
The Estate
Inheritance tax is chargeable on death as if immediately before death the deceased had
made a transfer of value equal to the value of his or her estate. In most cases, this will
be the value of the estate at that time. A person’s estate for inheritance tax is the
aggregate of all the property to which he or she is beneficially entitled.
The personal representative must value the estate as at the date of death and pay any
inheritance tax due within six months of the end of the month of death.
Once the personal representative has obtained the grant of probate or letters of
administration, he or she must administer the estate. In addition to the normal assets
such as property, the estate may include an investment portfolio, including shares.
Shares
When someone dies any shares in their estate are valued for inheritance tax purposes
at the date of death (often referred to as their probate value). During the period
between the date of death and the sale of the shares their market value may have
fallen. With the recent market volatility this could be a very likely occurrence. In
situations where the shares are sold at an overall loss, relief may be available if certain
conditions are met. The relevant inheritance tax legislation can be found in sections
178 – 189 Inheritance Tax Act 1984 (IHTA 1984).
The effect of the relief is to allow for the sale price of the sold shares to be substituted
for their date of death values (probate values). There are two consequences of
substituting a lower value: for inheritance tax the personal representative can claim a
repayment of tax that has been paid and for capital gains tax the CGT base cost will
be the lower value and this will mean that there will be no loss as a result of selling
the shares.
For the relief to apply it is irrelevant whether or not the estate has actually been fully
administered. However, it is important to note that this particular relief only applies
on the occasion of death.
Conditions for Relief
There is no time limit for claiming the relief, but the relief must be claimed for it to
apply. Before the relief can be claimed, the four following conditions must be met.
1. Qualifying Investments
The shares sold must be qualifying investments. The following are qualifying
investments:
 Quoted shares and securities, including those quoted on a recognised
foreign stock exchange.
 Unit trusts/OEICs.
 Shares quoted on NASDAQ.
 Unlisted securities market (USM) shares.
Further conditions for shares on NASDAQ and USM also apply. However, some
shares are not qualifying investments, as they are not quoted at the date of death.
For example, unquoted shares and shares traded on AIM.
2. Sale within 12 months of death
The relief only applies to qualifying investments that are sold within 12 months of
the date of death. No relief is given for shares that have fallen in value but have
not been sold during the 12 month period.
3. The Appropriate Person
To qualify for the relief the appropriate person must sell the shares. The
appropriate person is the person who is liable for the inheritance tax and will
usually be the deceased’s personal representative.
4. Loss on sale of shares
The relief is only available if the sale proceeds of all shares sold by the
appropriate person within 12 months of death is less than the date of death value
for those shares. All sales of qualifying investments must be included in the claim
for relief, not just those shares that have fallen in value.
Restriction of Relief
The relief will be restricted or reduced if the personal representative purchases any
qualifying investments within the period commencing on the date of death and
ending two months after the date of sale of the last of the qualifying investments
in respect of which a claim is made. The loss on the sale of the qualifying
investments will be reduced by the proportion of the aggregate of the purchase
price of the investments bears to the aggregate of the sale price of the investments.
Procedure
HM Revenue & Customs (HMRC) will only accept a claim for loss on sale of
shares relief if it is made on form IHT 35 by the appropriate person. If there is
more than one personal representative they will all need to sign the form. HMRC
will then check form IHT 35 to ensure it is complete and correct and the
conditions are satisfied. Provided everything is in order, HMRC will agree the
relief and repay any overpaid tax.
In the case of sales of land, relief can also be obtained for loss on sale of land
provided certain conditions are met (the relevant legislation can be found in
sections 190 – 198 IHTA 1984).
Trust Planning
Once an estate has been administered (and any loss on sale of shares relief
obtained), the beneficiary may wish to use that inheritance to undertake his or her
own inheritance tax planning. A common approach to inheritance tax planning is
to transfer assets into a trust for the benefit of their children. Because of its
flexibility, a discretionary trust is frequently used. Although there may not be an
inheritance tax charge in setting up the trust (for example, the value falls within
the nil rate band) there may be a charge at each 10 year anniversary, because the
value of the trust fund has increased. A solution to this problem can be found in
the Rysaffe principle. The Court of Appeal decision in Rysaffe Trustee Co (CI) V.
IRC (2003) endorsed this principle.
In a nutshell, this strategy works by creating a series of smaller trusts rather than
one single large trust. In this way it is possible to reduce the impact of both the 10
yearly charge and the exit charge assessments by giving each trust its own
separate inheritance tax nil rate band.
It is important to remember that the trusts must be created on different days. If two
or more settlements are created by the same settlor on the same day, they will be
treated as related settlements (section 62 IHTA 1984). This would mean that for
the purpose of applying the 10 yearly and exit charges, the value of the property in
all trusts would be aggregated together and tax charged as if all the property were
comprised in that one trust. For further details on the Rysaffe principle, please
visit www.legalandgeneral.com/taxandtrusts.
Conclusion
By making a simple claim for loss on sale of shares relief, the personal
representatives can reclaim tax overpaid. This adds to the amount the beneficiaries
receive and with which they can subsequently undertake inheritance tax planning.