The past few months have seen the values of stocks and shares fluctuate quite dramatically. This can have an adverse effect on estates and the amount of inheritance tax (IHT) that is paid.
An increasing number of executors choose to administer estates without the benefit of professional advice and therefore may be unaware of the relief that is available to assist or if they are aware of the relief may not take full advantage of it.
The General Rule | Shares
The assets within an estate are valued as at the date of the owner’s death and the IHT payable is based upon that value.
However, it is likely to be several weeks if not months before the executors of an estate are in a position to deal with transferring or selling shares that belonged to the deceased. They will normally have to wait until they have obtained the grant of probate.
In the intervening period of time there is the possibility that those shares may fall in value. The result therefore is that the value that the beneficiaries receive when the shares are sold is significantly less than the value on which the IHT has been paid.
The Solution
There is a relief available to executors and trustees of trusts in which the deceased person had a life interest, which enables them to substitute the actual sale price of shares sold following a death with the actual value as at the date of death for IHT calculation purposes and thus recover the difference in the IHT had already been paid.
There are however some strict rules which govern how this relief is applied such as:
- The shares must have been sold within twelve months of the death.
- Not all shares qualify for the relief although most shares quoted on stock markets and unit trusts do qualify.
- The shares must have been sold by the appropriate person – usually the executor of the estate.
- The claim for relief must be made within four years of the end of the twelve-month period from the date of death.
- All sales of qualifying investments that occur during the twelve-month period following the date of death must be included in the claim for relief whether those sales were all made at a loss or not.
Potential Traps
There are a number of traps into which the unwary can fall which may result in the relief being limited or not being available at all.These include for example not making the claim within the relevant period or not completing the sale of the shares within twelve-months of the date of death.
It is also important to bear in mind that if shares that have fallen in value are transferred to a beneficiary who then sells them that the relief is no longer available.
The claim for relief must also take into account the sale of all qualifying investments that are made during the twelve-month period. Therefore, if some shares are sold at a gain and others are sold at a loss the sale price of all of those shares whether sold at a profit or loss are substituted for the original probate values for IHT calculation purposes. The result therefore is that whilst the IHT paid on those shares sold for a loss is reduced the IHT paid on those sold at a gain is increased! Therefore, whenever an estate holds shares it is important to take advice and to plan carefully how and when those sales or transferred to beneficiaries particularly during times of falling stock market prices.
Any executor who requires further advice on this relief and whether it would apply to an estate that they are administering should contact the private client team of Stephens Scown who have offices in Exeter and Truro.
Next Steps
Ian Newcombe is a Partner at Stephens Scown.
If you are seeking advice or have any questions in relation to this article, you can contact us by calling 0345 450 5558 or by emailing enquiries@stephens-scown.co.uk
Alternatively fill out the form below and we’ll get in touch right away.
FAQs
For example, if your father paid $50 for a share of stock and it was worth $250 on the day he died, your basis would be $250. If you sell the stock immediately, you won't owe any taxes; if you hold on to it, you'll only owe taxes (or be eligible to claim a loss) on the difference between $250 and the sale price.
How do you cash out stocks from a deceased person? ›
After providing a death certificate, proof of identity, probate court order, and others, the heir can either transfer the shares into their account or sell the shares for the proceeds.
What happens to shares after a person dies? ›
The assignment of a nominee is sufficient to facilitate transactions in mutual funds and shares, as the same will be transferred to the nominee's name following the demise of the investor. However, we suggest you make a will as well since the rightful ownership will be established through a will.
What should an executor do with stocks in an estate? ›
Once appointed, the executor would write to the transfer agent for the company, fill out some forms, present copies of the court documents showing their authority to act for your estate, and request that the stock certificates be re-issued to the estate beneficiaries.
Do beneficiaries pay taxes on inherited stocks? ›
Inherited stock doesn't incur capital gains on any growth prior to your inheritance, but any change in value thereafter will likely trigger capital gains taxes when sold.
Do heirs pay taxes on inherited stocks? ›
Securities sold or gifted before the owner's death are subject to taxes based on the original cost basis. Inherited stocks, on the other hand, will often be subject to lower taxes because the cost-basis step-up reduces the amount of capital gains.
How long do you have to transfer stock after death? ›
If a TOD beneficiary has been named, then after the stockholder dies, his or her securities are immediately transferred to the designed party. The executor or administrator of the original owner's estate does not need to take any steps to facilitate the transfer.
How do I avoid paying capital gains tax on inherited stock? ›
You can hold the stock (any value increases after you inherit it will result in capital gains) or sell it at the stepped-up value without owing capital gains taxes. It's important to note that stock held in a retirement account doesn't receive a step-up valuation.
Do heirs pay capital gains tax? ›
If you inherit property or assets, as opposed to cash, you generally don't owe taxes until you sell those assets. These capital gains taxes are then calculated using what's known as a stepped-up cost basis. This means that you pay taxes only on appreciation that occurs after you inherit the property.
Can you transfer shares without probate? ›
In practical terms, and subject to the Articles of Association, the Executors can either become shareholders in the company themselves or transfer the shares to a third party, where the rules of the company allow. The remaining shareholders will need to be provided with evidence of the Grant of Probate.
If there are no specific provisions relating to the death of a shareholder, the shares will pass in accordance with the deceased's Will or, if there is no Will, under the intestacy rules.
What are the documents required for transfer of shares of deceased person? ›
What is the procedure to be followed for transmission of shares?
- Affidavit sworn in by the claimants.
- Indemnity Bond.
- Title Claim Form.
- No Objection Certificate from other heirs in favour of person claiming the title to shares.
- Surety Form.
Executors who violate their duty may face legal action by beneficiaries or creditors, although they cannot be held accountable for a decline in asset value unless it resulted from their unreasonable actions.
Who has more power executor or trustee? ›
It depends. If most of a decedent's estate is put into a trust, then the trustee of the trust would have more power. If by power you mean the capacity to distribute the decedent's estate. Generally, this tends to be the case if a person creates a trust and a will during their lifetime.
Can an executor sell shares before probate is granted? ›
Protecting Assets from Probate
While it is not possible to sell investments before probate is granted, there are ways to protect assets from probate and possibly even avoid probate entirely.
When should you cash out your stocks? ›
Occasionally, markets can get overly optimistic about the future prospects for a business, bidding its stock price to unsustainable levels. When the price of a stock reaches a level that cannot be justified by even the best estimates of future business performance, it could be a good time to sell your shares.
What is the 6 month rule for inherited stock? ›
If the value of the assets has dropped since the date of death or their transfer, the estate administrator can decide to use an alternate valuation date for the estate. This extends the valuation to six months after the date of death. Such a delay can serve to reduce the tax due on the inheritance.
What is the holding period for inherited stock? ›
Inheritances — Your holding period is automatically considered to be more than one year. So, when you sell the inherited stock, it's subject to long-term capital treatment. This applies regardless of the actual holding period.
