Many thousands of people in the UK have lost their lives during the Covid-19 pandemic and about 5% of those deaths will probably result in an inheritance tax charge.
Inheritance tax is charged on the estate of a deceased person as if, immediately before their death, they had made a transfer of assets, valued on that day. There are three crucial reliefs to consider where asset values may have fallen.
LOSS ON SALE OF AN ASSET
Where an asset was gifted within seven years before death, the inheritance tax payable in relation to property may be reduced where the value of the gift has fallen between date of the gift and death. The inheritance tax is calculated as if the lower value is substituted.
For example, suppose Robert gives an investment property to his daughter Roberta in October 2018, which was then worth £300,000. Robert died in July 2020, when the value of the property had fallen to £250,000. This value can be substituted for relief purposes.
However, if Roberta had sold the property in April 2020 for £275,000, that would represent the substituted value for inheritance tax purposes – IHTA 1984 s 131(1).
A claim for this loss on sale relief must be made by a person liable to pay the inheritance tax, no more than four years after the date of the donor’s death. There is no particular form for a claim but HMRC’s views on making the claim can be found at IHTM14627.
The relief can be extremely useful but there are a number of points to be aware of:
The relief does not affect the transferor’s cumulative total of transfers subject to inheritance tax, which remains at its original figure for the purpose of taxing any later lifetime transfers and the estate on death, or the tax originally charged at lifetime rates on an immediately chargeable lifetime transfer;
Where a transfer was immediately chargeable to inheritance tax at lifetime rates, the relief does not give rise to a repayment or remission of inheritance tax that has already become payable during the transferor’s life;
When valuing property transferred, no account should be taken of related property within IHTA 1984 s 161 or any other assets owned by the transferor or transferee; the values to be compared are the values, as at the dates of transfer and death or sale, of the transferred asset itself – IHTM14626;
The relief does not apply if the transferred asset is a ‘wasting asset’, that is an asset with a predictable useful life not exceeding fifty years immediately before the transfer – IHTA 1984 s 132.
POST DEATH SALES OF ASSETS
Inheritance tax relief is available where the estate on death includes an interest in land or buildings which is sold by the person liable for the inheritance tax (normally the personal representatives) within three years of the death at a genuinely lower value. That lower value is then the taxable value for inheritance tax, subject to certain conditions.
If the personal representatives sell further interests in land within the fourth year after death, all the sales by that person are generally taken into account IHTA 1984 s 197A, unless the sale value would exceed the value on death (or in certain other circumstances; see IHTM33074.
As with ‘loss on sale’ relief this post-death loss relief is potentially difficult and contains possible pitfalls. For example, if the land sold was held in joint ownership, care needs to be taken when making a loss relief claim if the value of the property was subject to a discount on death for inheritance tax purposes, as the discount does not apply post-sale.
A claim for the relief may be made using form IHT 38 and must be made within four years of the end of the three-year period during which qualifying sales can be made – IHTA 1984 s 191(1A). HMRC provides detailed guidance on these potentially complex provisions at IHTM33000 I– IHTM33182.
SALES OF RELATED PROPERTY
Related property relief applies where, within three years after a person’s death, there is a sale of any property comprised in his or her estate immediately before death which was valued for inheritance tax purposes under the ‘related property’ rule found in IHTA 1984 s 161.
If the relief applies, the sold property may be re-valued at the date of death without taking into account the related property rules or property passing under another title, with which it was originally valued.
As with the other reliefs, there are various conditions to be satisfied. For example, the vendors must be the persons in whom the property is vested or the deceased’s personal representatives; the sale must be at arm’s length for a freely negotiated price, and must not be in conjunction with other related property sales; and the vendor and the purchaser must not be connected.
A claim can then be made that the property at the death is valued freed from the related etc property provisions IHTA 1984 s 176(2).
REVIEW THOSE ESTATES
There is no telling how long the current economic slump is likely to continue. However, it would seem an appropriate time to review the affairs of individuals (and their family members?) with possible inheritance tax exposure on their estates with these reliefs in mind, including those who have tragically died from Covid-19. When elevated levels of mortality for older taxpayers are very salient, it perhaps makes good sense to suggest, other things being equal, that lifetime transfers be considered earlier rather than later and wills and estate planning are reviewed generally.
