Daniel Watson calls to extend the IHT loss relief window for the sale of investments in Taxation

This article was published in Taxation, 9 May 2023, and can be found here.

Extend the window for inheritance tax loss on sale relief claims

News that the Probate Registry has doubled its estimated timeframe for processing probate applications suggests that the system is coming under increasing strain. The stated increase in the processing timeframe from eight weeks to 16 weeks shows that the average timescale for dealing with applications is on the rise.

This has coincided with a ‘modernisation’ of the probate application process, following a move to primarily online applications, and a reduction in the number of regional registries.

Delays processing probate

The latest data from HM Courts and Tribunals Service suggests that straightforward online applications can take around four weeks to be processed, rising to 17 weeks for applications that need to be checked, for example if there is an error or query. For paper applications, the average time it takes to obtain a grant of probate from the point of applying is more than 20 weeks, representing a 50% increase over the past 12 months.

Delays to applications can result from HMRC not sending timely confirmations of inheritance tax payments to the Probate Registry. This can lead to applications stalling without any notification being given to the practitioner who submitted the application, resulting in further delays. In other cases, errors in administrative tasks, such as Probate Registry staff incorrectly scanning wills, can lead to applications being ‘stopped’, which can make an already protracted process even longer.

Where there is any delay or issue in processing a probate application, or if any further information is requested by the Probate Registry, the timescale from the point of applying to the point of receiving the grant can easily exceed six months. These delays compound what is already a difficult time for executors and beneficiaries, who quite justifiably feel frustrated by the Probate Registry’s standard of service.

As many practitioners will know, it can often take several months to collate the information required to complete an inheritance tax account and submit an application for a grant of representation depending on the complexity and number of assets in a deceased person’s estate. Once an application for a grant of probate has been submitted, it can then take several more months to obtain the grant, as a result of the delays described above. All this means that, for all but the most straightforward estates, it can quite easily take more than a year from the date of someone’s death to obtain a grant of probate.

Investments

One significant practical consequence of this relates to investment portfolios.

In the market volatility of recent years, it has not been uncommon for investments to fall in value following someone’s death. Inheritance tax is paid on the value of a deceased person’s estate as at their date of death. However, inheritance tax loss on sale relief allows a lower value to be substituted for the date of death value where investments are sold at a loss within 12 months of death, thereby potentially lowering the overall inheritance tax burden of an estate. This can be a valuable relief where investments lose value following a death.

However, if more than 12 months pass between someone’s death and obtaining a grant of probate, the opportunity to claim loss relief lapses in these circumstances, meaning that a valuable relief from inheritance tax is lost. Investment managers will often only act on instructions to sell investments once they have received a grant of probate (or grant of letters of administration in the case of an intestacy). Where a grant is not obtained within a year of death, investments standing at a loss cannot be sold within that timeframe, and consequently inheritance tax loss on sale relief cannot apply.

Window for claiming loss relief

The current window for claiming loss on sale relief, ie 12 months from death, was unproblematic when an application for a grant of probate took around two to four weeks to be completed, rather than the current timescale of up to, or sometimes much in excess of, 16 weeks.

Unless there is a notable decrease in the probate application timescale which appears unlikely in the short term the window for claiming loss on sale relief for shareholdings should be extended. Ideally, the window would be doubled from the current 12 months to two years from the date of death, as was recently recommended by the Association of Taxation Technicians in a Budget representation or at least extended to 18 months.

This would bring the relief closer in line with claims for loss on sale relief for land, under which losses on sales of land made within four years of death can qualify for inheritance tax loss on sale relief.

For beneficiaries of estates, higher than necessary inheritance tax liabilities are an unwanted outcome, and are arguably unfair where such delays result from excessive delays in processing probate applications. If the lengthy probate application process is here to stay, it would make good sense to extend the inheritance tax loss relief window. Otherwise, another ‘stealth tax’ might be here to stay.