Inheritance Tax Fall in Value Relief UK: Reclaiming Tax When Assets Drop After Death

Fall in value relief (also known as 'loss on sale' relief) allows an executor or personal representative to substitute the actual sale proceeds of certain assets for the higher probate value when calculating the inheritance tax due on the estate. In effect, it gives the estate credit for the fact that the asset was worth less when actually sold than when it was valued at the date of death. WHY IT EXISTS: IHT is normally calculated on the open market value of assets at the date of death. Between the date of death and the date of sale, markets can move significantly — equities can fall, property values can decline, or the asset may have been overvalued in the original probate valuation. Without relief, the estate would pay IHT on a value that was never actually realised. HOW IT WORKS: instead of including the probate value in the taxable estate calculation, the executor substitutes the actual sale proceeds (after allowing for selling costs in some cases). If the sale proceeds are lower than the probate value, the estate's IHT liability falls. If the estate has already paid IHT on the higher probate value, the executor can claim a refund from HMRC. TWO SEPARATE RELIEFS: Parliament enacted two distinct reliefs in the Inheritance Tax Act 1984 — (1) loss on sale of qualifying investments (shares, gilts, unit trusts, etc.) under ss.178–189 IHTA 1984, with a 12-month claim window; (2) loss on sale of land (including residential and commercial property, agricultural land) under ss.190–198 IHTA 1984, with a three-year claim window. The rules, conditions, and claim procedures differ between the two. You cannot mix and match — each relief has its own scope and its own claim form. IMPORTANT LIMITATION: you cannot cherry-pick which assets to claim relief on. For investments, the relief is calculated across all qualifying investments sold in the relevant period — if some went up and some went down, gains and losses are netted off.

The qualifying investments relief under ss.178–189 of the Inheritance Tax Act 1984 allows the executor to substitute the proceeds of sale for the probate value of qualifying investments where those investments are sold within 12 months of the date of death. QUALIFYING INVESTMENTS: the relief applies to: (a) shares and securities quoted on a recognised stock exchange (UK and foreign); (b) UK unit trust interests; (c) shares in UK authorised open-ended investment companies (OEICs); (d) gilt-edged securities; (e) bearer securities. It does NOT apply to unquoted (private company) shares, ISA cash holdings, or physical assets. THE 12-MONTH WINDOW: the relief only applies to sales made by the personal representatives within 12 months of the date of death. Sales made after 12 months (or sales made by beneficiaries after assets have been assented to them) do not qualify. THE NETTING RULE — THE CRITICAL COMPLICATION: you cannot claim relief on investments that fell in value while ignoring investments that rose. HMRC calculates the relief on the net position across all qualifying investments sold in the 12-month period. If the estate's quoted shares included Apple shares (fell from £50,000 to £30,000 — loss of £20,000) and Barclays shares (rose from £10,000 to £15,000 — gain of £5,000), the net relief is only £15,000, not the full £20,000 fall on the Apple shares. COST OF SALE: selling costs (broker's commission, stamp duty reserve tax) are deductible from the proceeds for the purpose of calculating the net position. CLAIMING: the executor makes the claim on form IHT35 to HMRC Inheritance Tax. The form requires details of all qualifying investments sold (whether at a gain or loss) in the 12-month window. REPAYMENT OR CREDIT: if IHT has already been paid on the higher probate values, HMRC will issue a repayment (with interest if appropriate). If the estate's IHT return has not yet been submitted, the relief is incorporated directly into the IHT400 calculation.

The loss on sale of land relief under ss.190–198 of the Inheritance Tax Act 1984 is available where land (including houses, flats, commercial property, and agricultural land) is sold by the personal representatives within four years of the date of death (for deaths before 16 March 1990 the window was three years; for post-1990 deaths it remains four years under s.197A). Wait — let me clarify: the standard rule under ss.190-198 is that the sale must be by the personal representatives (not beneficiaries) within THREE YEARS of the death for the relief to be mandatory on HMRC. There is an extended period under s.197A for certain cases. For simplicity this relief operates on sales by the PRs within three years of death. WHAT QUALIFIES: land in the UK (and in certain circumstances overseas) that was included in the estate at probate. Unlike the investments relief, the land relief is calculated property by property — there is no automatic netting between different parcels of land. HMRC OVERRIDE: HMRC can override a claim where they consider that a sale was not at arm's length (e.g., below market value to a connected person or a deliberate undervalue). If HMRC believes the true open market value of the land at sale was higher than the actual sale price, they will substitute their open market value figure. The relief is therefore not available for sweetheart deals — it is intended for genuine market transactions that crystallise a real loss. SELLING COSTS: solicitors' fees for the sale, estate agent fees, and related direct selling costs are deductible from the sale proceeds for the purpose of calculating the net proceeds. CLAIM FORM: the executor claims using form IHT38. The form requires the original probate value, the actual sale proceeds, the deductible selling costs, and the net loss. PRs vs BENEFICIARIES: if the land has been assented to a beneficiary before sale, the executor has lost the right to claim this relief. This is a critical timing issue — if a sale is anticipated and a loss is likely, the executor should consider selling before assenting the property to a beneficiary. INTERACTION WITH PRIVATE RESIDENCE RELIEF: if the property was the deceased's main residence, the beneficiary inheriting it may be entitled to private residence relief (PRR) on a subsequent sale if they live in it — a separate CGT consideration.

The relationship between fall in value relief (IHT) and capital gains tax (CGT) is important and often misunderstood. Without careful planning, claiming the relief can create an unexpected CGT liability for beneficiaries. THE CGT UPLIFT ON DEATH: normally, when a person dies, all assets in their estate are treated as acquired by the personal representatives (and then by beneficiaries) at their market value at the date of death. This 'uplift' (or 'rebasing') means that the inheritor starts with a CGT base cost equal to the probate value. When they later sell, CGT is only payable on gains above that probate value — any increase in value that occurred during the deceased's lifetime escapes CGT entirely. THE EFFECT OF FALL IN VALUE RELIEF ON CGT BASE COST: when fall in value relief is claimed for IHT purposes and the sale price is substituted for the probate value, the consequence is that the lower sale price becomes the deemed acquisition cost for CGT purposes for the beneficiary. This is because the relief effectively says that the value at death (for IHT) was the lower sale price — and the CGT base cost follows the same value. PRACTICAL EXAMPLE: shares with a probate value of £100,000 fall to £60,000 and are sold by the executor within 12 months. Claiming fall in value relief saves IHT at 40% on £40,000 = £16,000 IHT saving. But the beneficiary's CGT base cost is now £60,000, not £100,000. If the shares subsequently recover and are sold by the beneficiary for £120,000, the CGT gain is £60,000 (at 18%/24% rates depending on the beneficiary's circumstances) rather than £20,000 that it would have been without the relief. THE TRADE-OFF: the relief saves IHT at 40% but the reduced base cost may create extra CGT at 18–24% in future. For assets that are expected to recover in value, the net benefit of the relief needs to be weighed against the increased future CGT. The relief is always most clearly beneficial if the assets are unlikely to recover or if the beneficiary will not pay CGT (e.g., a charity beneficiary).

No — fall in value relief is not available where the sale was not a genuine arm's length commercial transaction. Both reliefs contain anti-avoidance provisions that prevent the relief being used to artificially reduce IHT by selling assets to connected persons at an undervalue. CONNECTED PERSONS: for investments relief (ss.178–189 IHTA 1984), there is an explicit rule that the relief is not available for a sale to a person who, at the time of the sale or within two months after, acquires the same or substantially the same investment (the 'bed and breakfast' anti-avoidance rule). More broadly, a sale between related parties at an artificial price will be challenged by HMRC. FOR LAND (ss.190–198): HMRC has statutory power to substitute the open market value for the actual sale price where they consider the sale was not at arm's length or where the sale price was significantly below open market value. HMRC may request a professional valuation of the property at the date of sale to compare it with the sale price. EXAMPLES WHERE HMRC WILL CHALLENGE: (1) Executor sells the family home to a family member at a discounted price ('keeping it in the family'); (2) Executor sells shares back into the estate or to beneficiaries at below-market prices; (3) A forced or artificially timed sale solely to generate the relief. GENUINE MARKET SALES ONLY: the relief is designed for cases where the asset genuinely declined in value between the date of death and the date of sale — for example, a stock market fall, a property market decline, or the discovery of a defect in the property after probate. It is not a mechanism for engineering tax savings through non-commercial transactions. HMRC SCRUTINY: HMRC increasingly scrutinises fall in value relief claims, particularly for land. Executors should retain evidence of the sale process (estate agent's marketing particulars, evidence of market conditions, conveyancing correspondence) in case of enquiry.

INVESTMENTS RELIEF (ss.178–189): the claim is made on HMRC form IHT35. The form requires: (1) details of all qualifying investments included in the estate (whether sold or not) — note that you list all qualifying investments, not just those that fell; (2) the probate values of those investments; (3) the sale proceeds of those sold within 12 months; (4) the net loss across the qualifying investments sold. The claim must be made within four years of the end of the month in which the death occurred (the general IHT claim time limit under s.241 IHTA 1984). The form is submitted to HMRC Inheritance Tax, BX9 1HT. LAND RELIEF (ss.190–198): the claim is made on form IHT38. The form requires: (1) the property address; (2) the probate value; (3) the date of sale; (4) the sale proceeds; (5) deductible selling costs. Claims must be made within four years of the end of the relevant period (four years from the date of death in most cases). WHERE IHT HAS ALREADY BEEN PAID: where the estate paid IHT on the original probate values and a fall in value relief claim reduces the IHT, HMRC will repay the overpayment. HMRC targets to process straightforward repayments within 15 working days. For larger or more complex claims, allow several weeks. INTEREST ON REPAYMENTS: HMRC pays interest on IHT overpayments at the applicable rate. Interest runs from the date the IHT was paid to the date of repayment. WHERE IHT HAS NOT YET BEEN PAID: if the IHT return is still being prepared (or an amendment has not yet been submitted), the relief is incorporated directly into the calculation on the IHT400 (main return) or the IHT400 corrective account. PROFESSIONAL ADVICE: given the netting rules, the CGT interaction, and HMRC's scrutiny of fall in value relief claims, executors dealing with significant share portfolios or property holdings should take professional advice before proceeding.