Daniel’s article was published in eprivateclient, 31 March 2023, and can be found here.
A proposal for the extension of the IHT loss relief window for investments
Delays affecting applications for grants of probate continue to persist. The higher death rate resulting from the Covid-19 pandemic created a surge in probate applications, at a time when the probate process was undergoing significant changes (moving to primarily online applications, with the number of regional registries reducing significantly).
Although recent data indicates that backlog pressures are beginning to ease (albeit gradually), many practitioners will know that some applications can take significantly longer than the Probate Registry’s stated deadline.
It was until recently possible to chase the Probate Registry eight weeks after submitting a probate application. That timeframe has now doubled to 16 weeks, which suggests that the situation is not improving. The latest data from HM Courts & 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 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 – a 50 per cent increase over the past 12 months.
That timescale can quite often be exceeded, in this practitioner’s experience. There have been instances of HMRC failing to provide the relevant documents to the Probate Registry to progress an application; and where simple administrative tasks like scanning in a Will were not carried out correctly by the Probate Registry. Both examples led to additional delays in obtaining a Grant of Probate; in both cases, the timescale from the point of applying to the point of receiving the Grant exceeded six months. The standard of service is often frustrating, compounding what is already a difficult time for clients.
In addition, if the Probate Registry has any queries about an application or requires further information, the probate application is ‘stopped’ until they receive the information required. Once that information is received, the application will often then go to the back of the queue, and can take up to a further 16 weeks to be dealt with.
It is worth nothing that the first step in the probate process – obtaining the information required to complete an Inheritance Tax account; arranging payment of any IHT; and completing the IHT and probate paperwork before actually applying for a Grant – can itself often take several months, depending on the number and complexity of the deceased’s assets.
Taking all of this into account, only executors of the most straightforward estates can have confidence that they might obtain a Grant of Probate within a year of death.
Ongoing delays in obtaining a grant of probate have many practical consequences, including delays in being able to sell assets held in a deceased person’s estate (such as residential property or investment portfolios). A Grant of Probate is often required before a deceased person’s investments can be sold.
Inheritance Tax is paid on the value of a deceased person’s assets at the date of death, even though some assets in the estate may subsequently significantly reduce in value (for example if there is a market downturn). Market turbulence has been near-constant in recent years, meaning that many deceased persons’ investments could lose value after their death.
To mitigate this, executors who sell a deceased person’s quoted investments at a loss can make use of a helpful tax relief. Where Inheritance Tax is paid on quoted investments and those investments are subsequently sold at a loss, executors can submit a claim to HMRC to substitute the (lower) sale value for the value submitted at the date of death. IHT is then recalculated on the lower value, and a repayment of IHT then follows.
The caveat is that, to qualify for the relief, the investment sales must be made within 12 months of the date of death.
Because of the Probate Registry’s delays, executors are often up against the clock to obtain a Grant of Probate within 12 months of death. If they do not have a Grant of Probate by that stage, the deceased person’s investments cannot be sold within a year of death, thereby preventing the IHT relief from being available. (For completeness, it should be noted that Capital Gains Tax considerations should always be considered before submitting a claim for IHT loss on sale relief.)
The current timeframe for loss relief (i.e. sales of investments taking place within 12 months from date of death) was more suitable at a time when an application for a Grant of Representation took between two and four weeks to be processed, rather than the current timescale of several months.
There is a strong case for increasing the time limit within which investments must be sold to qualify for the relief. 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, doubled from the current 12 months to two years from the date of death, as was recently recommended by the Association of Taxation Technicians, or at least extended to 18 months. This would bring the relief closer in line with claims for loss on sale relief for land (losses on sales of land made within four years of death can qualify for IHT loss on sale relief).
For the moment, unless the window for loss on sale relief for investments is extended, executors (and therefore beneficiaries) risk losing out on a potentially valuable IHT relief.