Probate lawyers have witnessed a significant increase in the number of cases as a result of the Coronavirus outbreak. The related volatility of stock markets and unstable property market has important tax implications for executors and their advisers.
Inheritance Tax is calculated based on the value of an estate on the date of death. Very often the value of an asset will change after death, particularly equity based investments and property. If an estate is liable to Inheritance Tax and the value of shares or property reduces after death, it is possible to claim a tax refund on the loss in value but this is subject to strict time deadlines.
If shares are sold at a loss within 12 months of death then executors can claim a tax refund. In effect the date of death valuation is replaced by the eventual sale figure and the Inheritance Tax recalculated accordingly to lead to a refund to the estate. Crucially the relief is not available if the shares are transferred to estate beneficiaries.
The same relief is available when a property is sold at a loss to the date of death valuation. In the case of property sales the time period is more generous than share sales with tax relief available provided the property sells within four years after death.
The tax refunds are not automatic and require an application to HMRC, again within strict time deadlines. A claim for loss on sale of shares must be made within four years of death. A claim for loss on sale property must be made within seven years of death.
Capital Gains Tax
When a death occurs during a period when stock or property markets are depressed there is always a possibility that those assets will increase in value prior to a future sale. Whilst any such gains do not have any Inheritance Tax implications, they may result in the estate incurring a Capital Gains Tax liability if those gains exceed the available exemptions and reliefs. It is the sole responsibility of the executor to ensure that the relevant tax returns are prepared and filed with HMRC and that all tax is correctly calculated and paid.
It is possible to reduce or in some cases eliminate altogether a Capital Gains Tax liability provided that appropriate planning is carried out. Such planning may include spreading the sale of assets over a sustained period of time to maximise the available exemptions, or strategically transfer assets to estate beneficiaries prior to sale.
We recommend that all executors take taxation advice during the course of an estate administration to ensure that they comply with their obligations to HMRC, that all available tax reliefs are claimed and the correct amount of tax is paid. This will ensure executors fulfil their legal duty of maximising the value of the estate for the estate beneficiaries.
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This article was written by Matthew Edwards, Partner in the Private Client Team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of June 2020.