Bereaved families with inherited assets that have dropped in value because of recent market turmoil or falls in house prices could reclaim thousands of pounds from the taxman.
When someone dies their estate is valued for inheritance tax (IHT) purposes based on how much it is worth at the date of death. The tax bill must then be paid within six months, and until this is settled the executor of the estate usually cannot apply for probate — the authority needed to sell most assets held in the name of the person who died.
It can take months for probate to be granted, during which time the value of assets such as shares and property can change significantly. In the first week of April the FTSE 100 dropped about 10 per cent, fuelled by market volatility caused by President Trump’s imposition of international trade tariffs.
• What the stock market chaos means for your pension
And few executors have the luxury of waiting for markets to rebound before they sell any stocks and shares held in an estate.
But if the value of those shares has dropped from the price they were assessed at for IHT, the executor can claim what is known as “loss on sale relief” and claw back tax from HM Revenue & Customs.
The relief is little-known but can result in tax refunds worth tens of thousands of pounds, particularly at times of investment or housing market turmoil.
James Ward from the London law firm Kingsley Napley said: “This is an incredibly important relief at turbulent market times like this because executors often do not have the luxury of holding on to shares until they rebound. They will often need to clear any loans, or debt with HMRC, as soon as possible.”
The relief could soon become even more important once the rules change in April 2027 to include the value of most pensions in estates for IHT purposes. A similar relief applies to inherited property which is sold at a loss, and may soon be used by more families if analysts’ predictions prove right and house prices start to fall.
• Inheritance tax changes: How thresholds and allowances work now
How does loss on sale relief work?
The relief is available to executors who decide to sell listed shares (and not transfer them directly into the name of a beneficiary). Executors often opt to sell shares as soon as possible because they, or the estate’s beneficiaries, may need to recoup money paid out, or borrowed, to settle IHT bills.
They do also have the option of agreeing a deferred IHT payment plan with HMRC, but this will incur interest.
It took an average of 13.5 weeks for probate to be granted to executors who applied via paper applications in February, while online applications took 4.5 weeks, according to HM Courts & Tribunals Service. But lawyers say it often takes much longer — in some cases more than a year.
• The reality of financial admin after someone dies
The relief allows executors to update the value of the listed investments given to HMRC at the date of death with the price that they were sold for. This recalculates the IHT bill and HMRC will refund any overpaid tax.
Say for example someone died with shares valued at £200,000, assuming that they were all taxable for IHT at 40 per cent. The IHT bill from HMRC would be £80,000. If the shares dropped in value by 10 per cent, as happened to many stocks earlier this month, and were sold at £180,000, the executor may be able to claim £20,000 loss on sale relief and be entitled to an £8,000 IHT refund.
The relief only applies to shares sold within 12 months of the date of death and executors must make a claim within four years after the end of that 12-month period. There has to be an overall loss on all shares sold in that period to qualify.
When markets are choppy, executors who are deciding between selling loss-making shares or transferring them into the name of the beneficiary, should consider selling, said Judith Millar from the law firm Broadfield. This is because realising the loss, “will mean that you can get a refund on some of the IHT you have paid,” she said.
If the value of the shares go up, you will not have to pay more IHT, but you could have to pay capital gains tax on increased profit.
• How can I reduce my inheritance tax bill?
When the pensions IHT rule change take effect, Chris Etherington from the accountancy firm RSM said the loss on sale relief was likely to apply to listed pension investments too. While the government is still finalising the details of the new rules, he said: “Based on how this relief operates, it is reasonable to assume that it will extend to shares held in pension pots in due course but it may be some time before this is confirmed.
“It means that the relief is likely to be even more important from April 2027 and families should familiarise themselves with it.”
What about relief if house prices drop?
Average house prices dropped 0.5 per cent between February and March, and 0.2 per cent the month before, according to the mortgage lender Halifax. There are fears that market volatility and economic uncertainty could dampen buyer demand and push property prices down further in some areas, such as London.
If families who are selling an inherited property are caught out by house price falls, they can claim “loss on sale of land”, which works in the same way as loss relief on shares.
Etherington said: “If the current economic uncertainty has an adverse impact on house prices, then IHT relief available for losses on the sale of land and buildings could be crucial.”
To be eligible for the relief, the loss made must be at least £1,000, or 5 per cent of the property value at death, whichever is lower.
The relief is only available if the executor sells the property within four years of death, and cannot be used if the property is sold or transferred to a beneficiary or their relatives. A claim must be made within seven years of the date of death.
