Falling markets – tax planning opportunity

Recent months have been characterised by sharp falls in the financial markets.At the time of writing, it is hard to see when this process will stop. Trustees and personal representatives may, however, be faced with the question of deciding, for the medium or long term, whether particular investments should be sold or retained for the longer term.Tax will undoubtedly be a factor but in the normal course it should not be the only one. A more fundamental question will be whether the investment should be disposed of because it is an unsatisfactory investment, or currently depressed market value merely represents a “blip” on the screen of a history of successful investment – but one which may possibly be able to be exploited to obtain what will, in the longer term, be seen to be a tax advantage.

One particular, tax advantage may be considered. Where investments subject to an IHT charge were owned by a deceased at the date of his death, or held in a trust fund at the time of the life tenant’s death, and they are sold for less than the market value at the date of death, the sale proceeds may be substituted for the market value at the date of death for the purpose of computing the IHT liability. Statistics show that only 5% or so of deceased estates within the charge to IHT. Nevertheless, when IHT is chargeable on death it is charged at a marginal rate of 40%. Few investments are certain to produce a 40% return over a period of 12 to 14 months, so that the prospect of obtaining an IHT saving by a well timed sale of investments or, worse, the risk of losing such a tax saving as a result of a badly timed purchase within a short time scale, may justifiably take priority over normal investment management considerations.