Private wealth law firm Boodle Hatfield has released new figures, showing that recent stock market volatility is likely to have caused significant investment losses.
Boodle Hatfield, the London-based law firm, estimates that 1,640 taxpayers a year on average will apply for refunds on inheritance tax after assets they inherited plunged in value. The figures shed light on how IHT remains a controversial tax at a time of oscillating asset values and rising inflation.
According to the firm, recent volatility in global stock markets means that many investors are likely to have made significant losses in the past year and will be looking to claim relief on inheritance tax paid.
Its figure comes after the latest figures from the UK’s tax authority, HM Revenue & Customs, show that inheritance tax revenues rose 14 per cent for the 2019-2020 tax year, the largest single rise in IHT receipts since the 2015-2016 financial year.
“A lot of people inheriting portfolios are likely to have made big losses this year given the plunge in stock markets. This means there is a high chance they have overpaid in inheritance tax," Kyra Motley, partner at Boodle Hatfield, said.
“It is therefore important that people administering estates start looking now at share loss relief and review portfolios before the 12-month period expires,” she added.
Refunds on inheritance tax for investment losses, known as IHT share loss relief, allow people inheriting a share portfolio to claim relief on their IHT bill when they sell shares in the portfolio at a loss, the firm explained in a statement this week. To be eligible for the relief, the sale of shares has to be within 12 months of the date of death.
However, HMRC does not actively inform taxpayers if they are entitled to a refund on inheritance tax should the assets they inherit subsequently fall in value, the firm said.
Using tax losses
The way that individuals can use falls in market values to obtain refunds is not unique to the UK. In the US, the term "tax-loss harvesting" is a commonly used one. Fund managers and wealth managers of IHT-linked portfolios using Business Property Relief, is well established in the UK.
Boodle Hatfield said people who inherit share portfolios must regularly check the value of their portfolio as they may miss out on claiming an IHT refund.
The relief applies to all "qualifying investments," the firm said. These are shares listed on a recognised stock exchange (excluding AIM), government bonds and/or holdings in investment funds. The claim needs to be applied to all qualifying investments which are sold, rather than only those sold at a loss. This means that people cannot simply count shares sold at a loss and claim back the inheritance tax paid.
Boodle Hatfield said the number of claimants for IHT share loss relief is expected to grow in the coming year given the current volatility in stock markets. Many global indices have experienced major losses recently, including the S&P 500 which is down over 18 per cent year-to-date.
“HMRC does not allow people administering the estate to cherry pick shares sold at a loss for the relief to be claimed. Though it does allow them to retain shares which have not fallen in value and sell only those which have fallen,” Motley said.
“People will have to think carefully, however, whether claiming the relief is right for them, considering they will have to sell their shares within a year of inheriting them. This means they could potentially lock in losses before share prices recover,” she stressed.