Losing a loved one is an already difficult time, and unfortunately there’s the added burden of administering the estate and pay Inheritance Tax (IHT). If assets have fallen in value, this may lead to excessive IHT. Thankfully, there are some key tax reliefs available.

What do we mean by excessive IHT?

IHT is charged based on the value of the assets in the estate. If an asset of the estate has fallen in value since the date of death, then you may have paid more IHT than you should, due to the lower asset value. Thankfully, the following reliefs are available to you, to account for some of the difference.

Before we look at the reliefs below, it’s worth noting that a Potentially Exempt Transfer (PET) is an absolute transfer of assets from one individual to another, which becomes exempt from IHT if the transfer is survived by seven years or more. Any IHT due on a failed PET is based on the value at the date of gift.

Fall in value relief

You can claim fall in value relief within four years of the death of a loved one, to reduce tax on a lifetime gift, or trustees can claim it to reduce additional tax payable on chargeable lifetime transfers. Click here for more information on lifetime gifts.

The amount of relief available will be the fall in value from the date of the gift, to the value at the date of death. So if the gift was valued at £10,000 and it fell in value to £8,000 at the date of death, the relief would be £2,000. If the donee has sold the asset before the date of death, the fall in value is the difference between the value at the date of the gift and the gross sale proceeds. So if the gift was valued at £10,000 and the donee sold this gift for £9,000 before the date of death, the relief would be £1,000.

This relief cannot be claimed if the asset has been gifted by the donee or for wasting assets, which are those with a predictable useful life of no more than 50 years (such as a car).

Post-mortem relief

As the name suggests, this relief concerns instances where assets are sold for a lower amount than their market value at the date of death (used for probate purposes). Where available, this relief will result in a refund of IHT. This relief can be claimed when:

1. Quoted shares/securities are sold by the executors within 12 months of death.

All sales of quoted shares in the period must be accounted for, and relief can only be claimed if there was an aggregated loss. As an executor, you must be careful if you wish to buy back the shares you have sold at a loss, as this would lead to a restriction in the relief that may be claimed.

2. Land/buildings are sold by the executors within three years of death.

All sales are taken into account and relief can be claimed for any aggregated losses within a three year period following death. Further losses made in a fourth year are also eligible for relief, but any profit within this fourth year can be ignored. Again, there are certain conditions on the purchase of land/buildings that could lead to a loss restriction.

3. Assets that have been valued in conjunction with other assets are sold within three years of death.

As part of a group of assets, some assets may be sold at a lower value than the original amount liable to tax. In this case, the ‘stand-alone’ value of the asset (the value of this single asset at the date of death), replaces the original value in the tax computation.

When to claim

You must claim post-mortem relief if you are the person(s) liable to pay the tax within four years of the end of the specific period applicable i.e. four years after the 12 month period for shares, and four years after the three year period for land and assets valued in conjunction with others. The relief can still be claimed after completing the administration of estates, if it’s within this time period.