Post-mortem tax planning: IHT - Loss relief

Assets held in an estate upon death are typically assessed for IHT at their ‘open market value’. Legislation states that this is the price which the property might reasonably be expected to fetch if sold in the open market at that time. It is also known as the probate value and is used to calculate inheritance tax (IHT).

Should these assets reduce in value over the coming months or years, and are sold by the personal representatives, there is planning to be considered. This is because the value received by any beneficiaries will be lower than that used as the basis for the calculation and payment of IHT.

Loss relief removes an unfairness, allowing an adjustment to be made for the purpose of IHT according to the value when sold. Separate claims with different conditions are available for shares and funds, and land and property which also determines the appropriate timescales within which this can be done (see below).

Land and property (IHT38)

A similar relief applies for post-death sales of land and property within four years of death and claimed within 7. Gains on other land or property disposed of within three years must be netted off, but only losses on the fourth year need to be taken into account. In terms of anti-avoidance, re-purchases should not be made within four months after the last sale within three years following death. The contract date is normally the date of exchange.

Other restrictions apply: one being, if the difference between the value at death and the value at sale was lower than £1,000 or 5% of the probate value, relief is not available. Also, in order that the relief is not artificially created, relief is not available when sold to a person, or certain connected persons, who are beneficially entitled. The relief will not apply if the purchaser was only entitled to some of the property sold.

Ultimately, both reliefs need to be claimed, and should not be taken for granted. It is also worth noting that reducing the taxable estate could have the effect of reinstating some, or all, of the residence nil rate band, so effectively the advantage could be 60%, rather than 40%.