IHT Loss on Sale of Quoted Shares: Reclaiming Inheritance Tax When Shares Fall After Death
If executors sell quoted shares within 12 months of death for less than the probate value, the IHT is recalculated using the actual sale proceeds — potentially generating a refund. The ss178–189 IHTA 1984 relief requires all share sales in the period to be pooled. Claimed on form IHT35, within 3 years of death.
Key Rules for Loss on Sale of Shares Relief
12-month window
The relief applies to quoted shares sold within 12 months of the date of death (the 'appropriate period'). Sales after the 12-month window do not qualify.
All qualifying sales must be pooled
If the executor sells some shares at a loss and other shares at a gain within the 12-month period, both sets of sales are pooled. The relief applies to the net position: if the aggregate proceeds of all qualifying shares sold exceed the aggregate probate values, there is no relief even if some individual lines were sold at a loss.
Only quoted shares qualify
ss178–189 apply to quoted (listed) shares and securities. Unquoted shares are covered by a separate relief for falls in value (s131 IHTA 1984). Unit trusts and OEICs are treated as qualifying investments. AIM shares are typically treated as unquoted for this purpose.
Sales must be at arm's length
Only genuine arm's-length sales to unconnected third parties qualify. Transfers to beneficiaries in specie (at the probate value) do not qualify. Nor do sales to the beneficiaries themselves at less than market value.
Claim within 2 years of the end of the 12-month period
The claim for relief must be submitted to HMRC using form IHT35 within 2 years of the end of the 12-month window after death — i.e. within 3 years of the date of death in total. Late claims are not accepted.
Relief is calculated at the marginal IHT rate
The relief reduces the chargeable value of the estate by the difference between the aggregate probate values and the aggregate sale proceeds. The IHT saving is that difference multiplied by the applicable IHT rate (typically 40%, or 36% for charitable estates).
Beware: selling shares at a gain forfeits some relief
If any qualifying shares are sold at a gain within the 12-month window, that gain reduces the available loss. Executors who need to sell some portfolio holdings should carefully consider the order and timing of sales to maximise the net relief available.
Frequently Asked Questions
What is Loss on Sale of Quoted Shares relief for IHT?
Loss on Sale of Quoted Shares relief (ss178–189 IHTA 1984) allows executors to substitute the actual proceeds of sale for the date-of-death probate values when calculating IHT, where quoted shares are sold within 12 months of death for less than their probate value. The IHT is recalculated using the lower sale proceeds — generating a refund of any IHT overpaid on the difference. This relief recognises that share prices can fall significantly between the date of death and the date the executor is able to sell the shares (probate can take 6-12 months), leaving the estate paying IHT on a value it never actually received.
How does the 'pooling' rule affect Loss on Sale of Shares relief?
The most important (and often misunderstood) aspect of the relief is the pooling requirement. An executor cannot cherry-pick which share sales to claim the relief on. Instead, all qualifying sales of quoted investments made in the 12-month window after death are pooled together. The aggregate sale proceeds are compared to the aggregate probate values. Only if the aggregate proceeds are below the aggregate probate values does any relief arise — and the relief is based on the net difference, not the individual loss-making lines. If an executor sells some shares at a gain and others at a loss, the gains reduce the available relief. Executors who are planning to sell the portfolio should consider whether it is possible to defer gain-making sales to outside the 12-month window (noting they will lose probate date pricing for IHT purposes) to maximise the net relief.
What shares qualify for Loss on Sale of Shares relief for IHT?
Qualifying investments for ss178–189 IHTA 1984 include: (1) shares and securities listed on a recognised stock exchange at the date of death; (2) units in authorised unit trusts and OEICs (treated as quoted investments); (3) shares in UK investment trusts listed on the London Stock Exchange. AIM-listed shares are treated as unquoted for this purpose and do not qualify for the Loss on Sale relief — they may instead qualify for the general Fall in Value relief (s131 IHTA 1984) on a different basis. Gilts and corporate bonds listed on a recognised exchange qualify. Unquoted shares in private companies have their own separate rules.
How do you claim Loss on Sale of Shares relief — what form is used?
The claim is made to HMRC using form IHT35 ('Claim for relief — loss on sale of shares'). The form requires: the probate value of each qualifying investment sold; the date and proceeds of each sale; a schedule of all qualifying investments held at death (including those not sold, to confirm the pooling calculation is complete). Form IHT35 is submitted to HMRC's Inheritance Tax team (BX9 1HT). If the IHT has already been paid, HMRC will calculate the refund due and pay it (with repayment supplement at HMRC's repayment interest rate, currently around 3.25% p.a.). The claim must be filed within 2 years of the end of the 12-month window (i.e. within 3 years of the date of death).
Can beneficiaries claim Loss on Sale of Shares relief if the executor transfers shares to them in specie?
No — the relief applies only to genuine arm's-length sales to unconnected third parties. Transfers of shares in specie (in kind) to beneficiaries do not count as sales for s178 purposes. If the executor transfers the shares to a beneficiary at the probate value (as is customary for in-specie appropriations), this does not trigger the relief even if the market value of the shares has fallen since death. Beneficiaries who later sell the transferred shares will have a capital gains tax position based on the probate value (their base cost), but this is a CGT matter, not an IHT refund. To claim IHT relief, the executor must sell the shares on the open market, not transfer them to beneficiaries.
Is there a similar relief for property (real estate) sold below probate value?
Yes — Loss on Sale of Land relief (ss191–198 IHTA 1984, claimed on form IHT38) applies where land or buildings are sold within 4 years of death by the executor at arm's length for less than the probate value. The mechanism is similar: the IHT is recalculated using the actual sale proceeds, generating a refund. The 4-year window for land is significantly longer than the 12-month window for shares, reflecting the longer time typically needed to sell real property. The pooling rules also apply differently — only 'interests in the same land' sold to the same buyer at the same time are pooled together, giving more flexibility than the shares pooling rules.
Help Your Executors Manage Your Investment Portfolio
A well-drafted will with clear instructions about your investments, and executors who understand IHT reliefs, can save significant tax when markets fall. Start with a WillSafe will kit.
View Will Kits from £39.99