IHT Loss on Sale of Shares Relief: s178 IHTA 1984 Explained
If shares in the estate fall in value between the date of death and the date of sale (within 12 months), the personal representatives can elect to substitute the lower sale proceeds for the higher probate value in the IHT calculation — potentially saving thousands in inheritance tax. But the election covers all qualifying investments together: gains and losses net off.
Conditions for s178 Relief
The investments must be 'qualifying investments'
The relief applies only to 'qualifying investments' as defined in s178 IHTA 1984. These include: shares or securities listed on a recognised stock exchange (UK or overseas); units in authorised unit trusts; shares in open-ended investment companies (OEICs); and shares listed on the Alternative Investment Market (AIM). The relief does not apply to: unlisted shares (other than AIM-listed shares); land or property (separate relief applies — see ss190–198 IHTA 1984 for loss on sale of land relief); personal chattels; or other assets.
The sale must occur within 12 months of the date of death
The relief only applies if the qualifying investments are sold within 12 months of the date of death. Sales after the 12-month window are not covered and the probate value stands for IHT purposes. The 12-month window is strict — there is no extension for administrative delays. Executors who anticipate a fall in market value should therefore act promptly. The 12-month period runs from the date of death, not the date of grant of probate.
The seller must be the personal representative
The relief applies when the personal representative (executor or administrator) sells the qualifying investments as part of the administration of the estate. Sales by the beneficiaries after the estate has been wound up (i.e. after the investments have been transferred to the beneficiaries) do not qualify for the s178 relief — though they may trigger capital gains tax considerations at that point. The executors must be the vendors.
An election must be made
The relief does not apply automatically. The personal representatives must make a formal election under s179 IHTA 1984 to substitute the sale values for the probate values. The election is made on the IHT return (IHT405 and IHT400) or by separate written notice to HMRC within the statutory time limits. The election covers all qualifying investments sold by the personal representatives within the 12-month window — it cannot be made selectively for only those investments that have fallen in value.
All qualifying investments are grouped — gains and losses are netted
The most important (and often misunderstood) aspect of the s178 election: when the election is made, the sale proceeds of ALL qualifying investments sold within the 12 months are substituted for the probate values of ALL those investments. This means gains and losses are netted together across the whole portfolio. If some shares have risen in value and others have fallen, the risen shares will partly offset the fallen shares. If the aggregate sale proceeds across the whole portfolio exceed the aggregate probate values, the election would actually increase the IHT charge — so it should not be made in that case.
Frequently Asked Questions
How much IHT can the s178 election save?
The saving depends on the extent of the fall in value between the date of death and the date of sale, and the IHT rate applicable to the estate. At 40% IHT, every £100 reduction in the IHT-chargeable value of the portfolio saves £40 in IHT. Example: estate includes a share portfolio valued at £500,000 on the date of death. By the time the executors sell the shares 6 months later, the market has fallen 20% and the total sale proceeds are £400,000. If the election is made, the IHT-chargeable value of the portfolio is reduced by £100,000 — saving £40,000 in IHT. However, if the portfolio also includes some shares that have risen in value (e.g. £20,000 gain), the net saving is reduced to £32,000 (£80,000 net fall × 40%). The full netting calculation must always be done before deciding whether to make the election.
Does the s178 election affect capital gains tax on the estate?
The s178 election affects the IHT probate value of qualifying investments — it does not directly change the CGT position. For CGT purposes, the executors' acquisition base cost is the market value at the date of death (the 'uplift' to market value on death applies regardless of the IHT election). However, because the executors have actually sold the shares below the date-of-death value, there will typically be a CGT loss on the sale — which can be set against any capital gains in the estate. In practice, the s178 election and the CGT loss work together: the IHT is reduced (by the election) and the CGT shows a loss (which can be used in the estate). The interaction between the two should be modelled before making the election.
What is the deadline for making the s178 election?
The election must be made within the later of: (a) 2 years from the end of the month in which the death occurs (i.e. up to 26 months after death); or (b) the date of delivery of the IHT account (IHT400). In practice, executors typically include the election in the original IHT400 when the fall in market value is already known and confirmed by actual sales. Where the fall occurs after the IHT400 has been submitted, the election can be made within the 2-year window by amending the return. HMRC will then recalculate the IHT and repay any overpaid tax plus interest.
Is there an equivalent relief for falls in the value of land?
Yes — ss190–198 IHTA 1984 provide a separate 'loss on sale of land' relief. Where land or property in the estate is sold by the personal representatives within 4 years of the date of death at a price lower than the probate value, the personal representatives can elect to substitute the sale price for the probate value. The 4-year window for land is significantly longer than the 12-month window for shares. The land relief rules are more complex — there are restrictions on improvements to the property between death and sale, and the definition of 'qualifying interest in land' must be checked carefully. Unlike the s178 shares relief, the land relief does not require all land sales to be grouped — individual properties can be elected independently.
What if some shares have been transferred to beneficiaries rather than sold?
Only shares actually sold by the personal representatives within the 12 months qualify for the s178 relief. Shares transferred to beneficiaries in specie (i.e. transferred without being sold) are not treated as sold and cannot benefit from the relief. This means executors who transfer a portfolio to beneficiaries in specie lose the opportunity to claim any s178 relief on that portfolio. Where a market fall has occurred and the election would produce an IHT saving, executors should consider selling the portfolio rather than transferring it in specie — accepting that the beneficiaries will re-acquire at the lower sale price (giving them a lower CGT base cost but a better IHT outcome for the estate).
Can the election be made if the shares were already at a loss at the date of death?
The s178 election is only relevant where the shares have fallen further in value after the date of death. If the shares were already at a low value on the date of death (e.g. the deceased bought them at a high price but they had already fallen before death), that fall is already reflected in the probate value — no election is needed for that element. The election only substitutes the sale proceeds where they are lower than the probate (date-of-death) value. If the market recovers between the date of death and the date of sale such that the sale proceeds exceed the probate value, the election would increase the IHT charge and should not be made.
Are You an Executor Dealing with a Falling Portfolio?
If the estate includes shares or funds that have fallen since the date of death, the s178 election may significantly reduce the IHT bill — but it must be made within 12 months. Take specialist advice early. And for the will that created the estate, WillSafe kits provide a clear, professional starting point.
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