Inheritance Tax – Fulfilling your obligation

When someone dies, their assets are valued as at the date of death (known as the probate value). These values are reported to HMRC with the total value determining whether any inheritance tax liability arises. In certain circumstances and with certain assets, various exemptions/reliefs can be claimed to reduce an inheritance tax liability. Where inheritance tax is due this is payable before the Grant is issued, although it is possible to elect to pay the tax due on certain assets in instalments.

The initial tax settled when submitting the values to HMRC may not necessarily finalise the estate’s liability, as the tax may need to be recalculated due to a change in the date of death value. This can be due to an additional asset being found or simply matters which were unknown at the date of death coming to light. The date of death values and any claimed relief/exemptions are also subject to HMRC’s approval and they may negotiate the values where they feel this is appropriate i.e. the value of a property.

It is not just the change of a date of death value which can mean the inheritance tax liability being amended. Where qualifying securities and property/land are sold for less than their probate value, a claim can be submitted for the sale value to be substituted for the probate value. This can result in a refund to the estate of the tax paid on the difference between the two figures. This is of particular relevance at present due to the economic volatility and market swings caused by the coronavirus pandemic.

The relevant period for a claim for qualifying securities is those sold within 12 months of the date of death and this period extends to four years for property/land. Qualifying investments include shares and securities listed on the stock exchange and unit trusts but do not include holdings in unlisted companies or companies listed on the Alternative Investment Market. It is worth noting that there are strict timescales for the claim to be submitted.

For qualifying investments, such relief is based on the net loss figure of all the sales and purchases during the period and not just the ones which have been sold at a loss. The value is based on the disposal price, ignoring commission and costs. For property/land the relief is based on the gross sale price without taking into account the sale cost.

It is important to note that the relief is not available in certain circumstances notably where the difference between the date of death value and the sale price is less than £1,000 or 5% of the value on death, where the only sale is of an asset covered by agricultural or business relief at 100%, the disposal is not undertaken by the Personal Representatives or the disposal is to a beneficiary or their relatives.

Where a claim is accepted by HMRC, the gross sale proceeds are then treated as the estate’s base cost for Capital Gains Tax purposes. It should be noted that residential property gains, until now, have been generally due by 31 January in the year following the end of the tax year in which the gain occurred. However, since 6 April 2020, any capital gains tax due on residential property is now payable within 30 days of the gain.

Dealing with an estate’s inheritance tax liability can be an onerous task, and it is very easy for someone unfamiliar with such taxes to overlook a potential relief/exemption or something that might be material when assessing the estate’s liability.  A Personal Representative can be personally liable if they fail to disclose relevant information for tax purposes and/or pay any tax due. Our private client lawyers have years of experience in helping administer estates and ensuring all the responsibilities are fulfilled as tax-efficiently as possible while ensuring that all the obligations to HMRC are met. Please do not hesitate to contact a member of the team to discuss matters further or see how we can help.