Are you owed an Inheritance Tax refund?

Inheritance Tax refund
In the 2018/19 tax year, more than 4,500 people claimed an inheritance tax refund, due to a difference between the valuation of property given at the time of death and its actual sale price. Are you owed the same?

If you inherit a property and sell it for less than the value you provided to the tax man for Inheritance Tax purposes, you could claim back the overpaid tax. To be eligible, the sale must take place within 4 years of the death. If you’re entitled to the refund, HMRC won’t be in contact (no surprise there!) – you’ll have to initiate the claim yourself.

How many people have claimed?

4,516 people claimed in the 2018/19 tax year, but the number of people applying for this little known rebate has more than doubled since the previous year. According to figures obtained by NFU Mutual in a Freedom of Information request, 2,177 applied for an inheritance tax (IHT) rebate in 2016/17.

Why are the number of rebates increasing?

Whilst across the Country average house prices may have risen year-on-year, this stat doesn’t paint a full picture. Over the last 2 years, the average price in London fell 2.5%, while the fall in Cobham in Surrey was a more dramatic 4.5%. Average prices in Oxford have also declined by 5.5% over the last two years.

Of course, the forthcoming election and Brexit uncertainty is doing little for buyer confidence. Perhaps this is why we have seen more dramatic changes recently: the average property price fell by 1.2% in the East Midlands and 1% in the South East over the course of just one month (see chart below).

A difference between the valuation for IHT purposes and the sale price is more likely if it takes a while to sell the property. The average time to sell a house depends on how ‘hot’ or ‘cold’ the property market is for your area, according to The Advisory. Ordinarily the countrywide average is 4.2 months, although in cold areas the average length of time can increase to 5.6 months. However, Brexit uncertainty may be impacting those averages right now: three million Britons say they have put off buying a home because of Brexit, according to figures published by Royal London this week, and estate agents report slower sales and a greater degree of caution.

Who is likely to be affected?

Overpayment of IHT is a possibility where the value of the Deceased’s estate included a property and exceeded the Inheritance Tax threshold.

The basic threshold for an individual is £325,000 – and on top, there’s a Residence Nil Rate Band (RNRB) available if the estate includes a property left to a ‘direct descendant’. A direct descendant is a lineal descendent i.e. someone who is in direct line from an ancestor; this includes a child, grandchild, great-grandchild etc but not necessarily a blood relative (see HMRC Detailed Guidance for more info). The RNRB for this tax year is £150,000 – and this increases to £175,000 for the 2020/21 tax year.

Although the combined IHT allowance of £475,000 might seem generous, it is important to appreciate that the RNRB won’t apply if the beneficiary of the property is a niece, nephew or some other person who doesn’t fall under HMRC’s definition of a direct descendant. If the RNRB doesn’t apply, only the basic £325,000 threshold is available.

Further, even if the RNRB does apply, average house prices in many parts of the country such as London, the South East, East of England and South West will put many estates close to or over the Inheritance Tax threshold where a property forms part of the assets. Find out more about inheritance tax allowances here.

The latest data from the UK house price index is as follows:

RegionAverage price September 2019Monthly change % since August 2019
East Midlands£194,219-1.2
East of England£291,993-0.4
London£474,601-0.1
North East£132,7690.0
North West£167,683-0.3
South East£329,1971.0
South West£260,1580.0
West Midlands£201,273-0.4
Yorkshire and the Humber£165,745-0.1

Source: Gov.uk.

Am I eligible for a refund?

You are likely to eligible for an IHT refund if:

  • The value of the estate exceeded the Inheritance Tax threshold and IHT was therefore due;
  • You provided a valuation of the property to HMRC at the time of death and this was more than the sale price;
  • The property was sold within 4 years of the date of death for a claim to be possible (unless the sale relates to a Compulsory Purchase Order, in which case the 4 years may be extended); and
  • You are an ‘appropriate person’ (see below).

The date of sale is taken to be the date of exchange of contracts (except in Scotland, where it is the date on which terms of the offer and qualified acceptance have been agreed in writing).

Who is an appropriate person?

The ‘appropriate person(s)’ can make the claim: these are the persons who are liable for the Inheritance Tax, such as the executors, administrators or trustees. If more than one group of people
is liable for the tax, the ‘appropriate persons’ are those who are actually paying it.

How do I claim?

To claim overpaid the overpaid Inheritance Tax, you need to complete and submit form IHT38 “Inheritance Tax: claim for relief – loss on sale of land”.

Should expenses be deducted?

No, estate agent’s commission, stamp duty, legal fees etc should not be deducted when claiming. The claim is based on the gross sale price which is usually the agreed sale price in the sale contract.

Is there a minimum claim?

Yes – you cannot claim if the sale price differs from the value on death by less than £1,000 or 5% of the value on death, whichever is lower.

Are there any restrictions on who I can sell to?

You may not be able to claim relief on a sale to a beneficiary or the relative of a beneficiary. Any profit from such a sale or exchange may reduce the relief on a qualifying sale.

What if the estate was not subject to inheritance tax?

If the estate was not liable for inheritance tax, you cannot make a claim.

NB: The above is intended to be a general guide to inheritance tax rebates in circumstances where a property has dropped in value since the IHT calculation. If you need specific advice on making a claim, call HMRC’s helpline on 0300 123 1072.

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