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There's no avoiding the fact that the value of shares is generally lower than a few years ago. This has led to specialists in the IHT field raising the alarm bell on a problem which often crops up where less experienced practitioners and lay executors are acting for an estate.
Problem one - falling values
A will usually gives executors the power to sell, convert or transfer assets (known as appropriation), including shares, in order to meet debts and, in some cases, to pay out legacies to beneficiaries. But that's where the problem starts. Inexperienced executors are selling or transferring shares at current low values and not realising that they could be entitled to reclaim some IHT as a result.
Lost relief
Where a sale or transfer of shares is made within one year of death at a value less than they had for probate, IHT can be recalculated using the lower value. This can mean there's an opportunity for substantial tax savings.
Example. John died on December 15 2011 leaving within his estate shares worth £50,000 on which IHT of £20,000 (£50,000 x 40% IHT = £20,000) was paid. The shares are now worth £40,000. If they are sold by December 14 2012 the executors can claim a reduction of IHT of £4,000 (£50,000 - £40,000 = £10,000 x 40%).
Tip. Executors should revalue qualifying investments a few weeks before the first anniversary of the deceased's death and consider selling those standing at a loss.
Trap. An anti-avoidance rule stops executors from dumping shares to create a loss, claiming back IHT, and then buying back the same or different shares. This applies to purchases made within two months of the last sale.
Example. An estate includes shares that have a probate value of £20,000. The executor sells them within twelve months for £18,000. The loss was £2,000. But within two months of the last sale the executor buys other shares for £10,000. The loss relief is reduced by:
£10,000/£18,000 x £2,000 = £1,111
The net loss that can be claimed is now:
£2,000 - £1,111 = £889
Problem two - all or nothing
To calculate the loss, you have to include all the investments sold or transferred within the twelve months since death. That means if you sell some for more than probate value, the profit will reduce the loss on which you can claim the IHT reduction.
Tip 1. If you need to sell or transfer shares that have a value higher than at probate, defer the sale until after twelve months have elapsed since the deceased died.
Tip 2. If you think you've missed out on claiming an IHT reduction on share etc. losses, think again. Currently you have six years in which to make a claim.
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