Private Client/Wills and Probate: Tax options for dealing with post-death asset losses

Sometimes when a testator dies and an asset within his estate is sold, that asset will produce a loss. i.e. the asset will be worth less at the point of sale than it was at the testator's time of death.

In order to reduce the tax bill, there are circumstances in which the executors will be able to claim tax relief on such a loss. These circumstances are: (1) land that has sold and made a loss within 4 years of death, and (2) shares that have sold and made a loss within 1 year of death.

If one of the above situations applies, the executors will have two possible options:

OPTION 1: Claim 'IHT Loss Relief' - this has the effect of 'pretending' the asset was worth X at the date of the testator's death. X = the current, lower value of the asset. This means the executors can claim a refund from HMRC on the difference between the old value and the new value of the asset.

For example: the testator's shares in Tesco Plc were worth £6,000 at the date of his death but when they were sold 6 months later they were only worth £4,000. IHT Loss Relief would pretend that at his death they had been worth £4,000. This means that too much IHT was paid to HMRC at the time of death, and a refund of £2,000 is now required.

OPTION 2: Offset CGT losses against CGT gains made in the same tax year - this option can only be used where 'gains' have been made in the same tax year. The effect will be to reduce the entire CGT bill for that year.

For example: (continuing on from the above example) if the testator's house had been sold at a gain of £10,000 (it was worth £190,000 at death but sold for £200,000) but then a £2,000 loss was made on his shares in Tesco Plc, the executors would be able to off-set the loss of £2,000 against the gain of £10,000. The total CGT liability would be £8,000.

NB: it is NOT possible to use both IHT Loss Relief and also CGT relief. This is because if IHT Loss Relief is claimed, we are pretending that the death value was the same as the sale value, and therefore there has not been any loss in which we could off-set CGT!