Acting as an executor can be a challenging, time consuming and emotional role.
There is often a lot of paperwork to complete; a number of people/institutions to contact and many different factors to think about when arranging the distribution of an individual’s estate.
The current situation will naturally have made this even more difficult, with the obvious obstacles in meeting certain individuals, including potential beneficiaries and professionals, and getting paperwork completed and returned.
However, COVID-19, and in particular the downturn in markets and asset prices in response to this, potentially presents a further dilemma to executors.
For individuals who die with an estate in excess of their available allowances, inheritance tax (IHT) will be paid on the estate value as at the date of death. For those who died shortly before the COVID-19 outbreak, this may be significantly higher than the current value of some of their assets, following the pandemic’s impact on asset prices in recent weeks.
However, relief may be available allowing executors to reclaim some of the IHT they have already paid.
‘IHT share loss relief’ allows executors to reclaim overpaid IHT due to the fall in value of investments between the date of death and distribution. This relief is available when investments are sold, prior to distribution to beneficiaries, at a reduced value to that which IHT was calculated on i.e. value at date of death.
Any IHT paid on the difference between these two figures is potentially able to be reclaimed.
A similar relief exists for losses made on properties sold prior to distribution to beneficiaries.
For many executors, understandably, their desire will be to distribute an estate as efficiently as possible, avoiding making too many decisions on behalf of beneficiaries, where possible. For example, this could mean passing on investments directly to beneficiaries for them to then decide when is the best time to encash these, depending on market performance and likely capital gains tax (CGT) position.
However, by doing so, they could miss out on potential IHT relief of 40%, meanwhile the highest rate of CGT the beneficiaries will be able to save is 28% (if offset against residential property gain).
This is best illustrated using an example:
An individual dies with investments in excess of their nil rate band, worth £500,000. They had two children who will inherit the estate equally.
The executors settle the IHT liability (£200,000) from cash deposits within the estate and obtain probate. Due to falls in markets the investments are now valued at £400,000. Detailed below are the two options:
Option 1 - Transfer the portfolio to the beneficiaries. They would each inherit the investments of £200,000 at a base cost of £250,000. They could potentially sell the portfolio immediately incurring a loss of £50,000 which could be offset against any other capital gains in the future. This would achieve a maximum CGT saving of £14,000 (i.e. £50,000 x 28%).
Option 2 – Alternatively, the executors could sell the portfolio and distribute the proceeds (£200,000 each) to the beneficiaries. As the executors have sold the investments at a loss, they can recalculate the IHT bill using the sale proceeds rather than the value at the date of death. This would save £40,000 (i.e. £100,000 x 40%) which can then be distributed to the beneficiaries, in addition to the investment portfolio.
As with most tax planning, there are certain timeframes and conditions associated with claiming this relief, and therefore we recommend seeking professional advice.