I hereby bequeath less than a year ago

There is an upside to falling markets, although some might consider it maudlin. Because of the erosion in property prices and investment portfolios, investors are having some success reducing their inheritance tax (IHT) bills by reviewing the value of their estates.

Since markets started to slump almost two years ago, tens of billions of pounds have been wiped from the value of family estates, according to accountants’ estimates. So advisers are encouraging their clients to revalue assets they were planning to pass to heirs to benefit from any price falls. While gold and silver jewellery is likely to be more expensive because of the surge in the value of precious metals, chances are that a 20-year-old Rolls-Royce could be sold at a more knockdown price.

“The events of the last 18 months mean that calculations of the value of assets can now be awry and the benefactors may leave vastly different monetary values to their beneficiaries,” according to Andy Kirby, a senior trusts and tax manager with solicitors Moore Blatch.

“Revisit your will or if a death has already occurred, try to ensure that you don’t pay IHT based on the price of an asset that has fallen dramatically between death and sale,” he explains.

As the rules stand, gifts granted to a UK-domiciled heir who is not your spouse within seven years of a death are subject to inheritance tax and so are those awarded to a trust.

Another incentive for pensioners considering a gift in their lifetime is that losses on stock portfolios can be offset against gains on a property – as long as they are made to the same heir.

“If I put a share portfolio into a trust for my son and it makes a £20,000 loss I can offset that against the property I gifted him which made a £30,000 gain,” explains Mike Warburton, senior tax partner at Grant Thornton.

Another perk is if you sell shares at a loss, of say 40 per cent, you can avoid capital gains tax by recording that as its value at the time of the gifting.

Falling markets present a particularly favourable tailwind to executors sorting out an estate after a recent death. This is because HM Revenue & Customs permits trustees to substitute the sale value of a home for its value at death if the house is sold within three years.

Similar rules apply to share portfolios. So, for example, if your uncle has died within the last year, the executor of his will could sell shares now at a discount and report that amount to the Revenue.

A loophole exists, however, that may prevent couples who are filing jointly from receiving these benefits. If you sell a property owned jointly with your husband and he dies, a discount of
10 to 15 per cent is usually awarded by the probate valuers from the Revenue, at the time of his death.

But the discount will not apply if you choose to sell the property and use that valuation.

Take this example. A property owned by a couple is valued at the time of a spouse’s death at £1m. It sells for £950,000. But after a discount of 10 per cent, the executors might value a half-share in the property at just £450,000.

“By making the election, they would therefore be increasing the value for IHT purposes from £450,000 to £475,000,” claims Grant Thornton’s Warburton. He calls this “a nasty sting in the tail for which they could be held personally responsible”.

The nil-rate band for IHT is set to rise from £312,000 per person to £325,000 in April. But it could rise higher if the Conservative Party comes to power. David Cameron, the party’s leader, has already indicated that, if elected, married couples will benefit from a nil rate band of £2m. The nil rate limit for an individual will be set at £1m.

Advisers point out that, in times of recession, it is important for individuals to strike a balance between minimising their IHT liabilities by passing on assets and funds to their children early and ensuring that have enough to live on in their later years.

The market downturn means that pension funds and savings are worth less and annuity rates are likely to fall below 7 per cent because of falling interest rates and bond yields.

Last July, a 65-year-old man with a £100,000 fund could have bought an annuity of £7,920. These days, he would only receive £7,240 a year.