TAXING THOUGHTS FOR TAXING TIMES
The past few months have proved extremely challenging for everyone, not just the legal profession. The way in which we have all coped and adapted to new circumstances has been an inspiration, and if anything proves that thinking outside the box is no bad thing.
A former work colleague of mine lost a relative last year following a long illness, and mentioned to me that pretty much all the cash investments within the estate had been drawn down to pay the initial liability to Inheritance Tax, leaving just a large managed fund of shares held within an ISA, which could not be accessed till probate had been granted. The application had been lodged at the Probate Registry when we spoke in late March, but how long till the grant issues is anyone’s guess. She had watched the FTSE index fall over the month prior to our conversation, and was concerned. I mentioned loss on sale relief, under which any shares sold before the first anniversary of death at below the value at death qualified for a rebate of IHT by substituting the lower sale value and completing form IHT35. She thanked me and was going to look it up on line so as to be ready with her instructions to the solicitors handing the administration.
Afterwards, the conversation reminded me of a case I had about 25 years ago with an estate that contained a portfolio of quoted shares. Once we got the Grant, the deceased’s daughter – and sole residuary beneficiary – said she did not want the hassle of all her mother’s shares and instructed me to “sell the lot”. In those days they were all individual certificated holdings, and dividends arrived by cheque.
As it was an IHT paying estate, I spent one lunchtime with the Daily Telegraph open and covered the share prices page with sandwich crumbs; I copied over the current valuations onto a photocopy of the probate valuation prepared by the Stockbroker with whom the firm where I worked had a regular retainer. The result was interesting. The bottom line value of the whole portfolio had barely altered, yet some of the individual holdings had shifted substantially over the six months or so since death. I separated out those which had increased – unless it was by only a few pounds – from those which had gone down. The end result was that the “donkeys” had lost about £12,500. I reported back to my client that if we split the holding and she took the shares that had increased in value, and we only sold the ones that had gone down, we could get back almost £5,000 in Inheritance Tax. She was delighted, especially as I said that if she wished to sell the ones transferred to her afterwards, the gains would be within her annual CGT allowance provided she did not sell them all within the one tax year. The tax rebate pretty much paid all the costs of administering the estate.
Had I simply obeyed the client’s initial instruction, there would not have been enough of a loss on the sale to cover the costs involved in completing and filing the IHT35. This is because HMRC only allows the overall loss to be calculated. I have to say that the tip of selling only the shares that had decreased in value and transferring in specie those that had gone up came from my Probate lecturer at Chester College of Law in 1984/5, but it was one I had remembered and was pleased to put into action.
Fast Forward to only three or four years ago, when I was doing some locum work, I spotted very much the same thing on a file I had been given, only all the shares (which had been in a life interest trust) had already been sold by the Trustees, who were winding up the trust independently. We were able to get back about £2,500, but it would have been more had the Trustees thought to ask first – assuming the fee earner with conduct of the file at the firm in question had been canny enough to spot it…..