Thousands of us Brits may have paid more inheritance tax (IHT) on residential property than they needed to, according to new figures released today. Using inheritance tax breakdowns from HMRC and monthly house price data from Land Registry, tax specialists at financial services provider NFU Mutual have estimated that up to £90million in tax could be reclaimable
Prior to the credit crunch, we’ve all been used to a situation where house prices have risen rapidly and on that basis it often meant that tax was paid on a value lower than that actually achieved. That is tough luck on HMRC – they can’t claim more tax.However, house prices in the UK have fallen on average 11 percent in the last four years and therein lies the opportunity
Under Section 191(1) of the Inheritance Tax Act 1984, sale of land relief is available if an appropriate person – generally an executor:
- Sells an interest in land or a building from a deceased’s estate – which includes a home or any buy-to-let property – to an unconnected third party
- Within 48 months of the death (but under Section 241(1) of the Inheritance Tax Act 1984 the claim can be made up to 6 years after death)
- For a value that is lower than the date of death value – the proviso here is the actual sale price has to be at least £1,000 or 5% (whichever is the lowest) less than the date of death value of the property on which IHT was calculated
If these points are proved, the date of death and actual sale values are switched and the tax is paid on the actual sale value
Sale of land relief is calculated like this:
X died in August 2008. X’s house was part of his estate that was valued at £500,000 to calculate Inheritance Tax
In December 2010, X’s executors sold the house on the open market for £350,000
The executors claimed sale of land relief. The date of death value of the house for IHT was switched with the sale price to bring down the taxable amount for IHT to £350,000.
Because the £150,000 was more than £1,000 or 5% of the value on death (£25,000), the claim was allowed giving X’s heirs a rebate of £150,000 x 40% in Inheritance Tax, or £60,000!
Although in general it is not open to HMRC to claim extra tax if a property is sold for more than the date of death valuation, if more than one property was inherited and sold but only one valuation has gone down and the others have gone up, then all the property is reassessed for IHT and the taxpayer could end up paying more.
Claims involving agricultural or business property attract special reliefs and calculations involving people who already have an interest in a property buying from an estate are also more complex
Not just property
A will usually gives executors the power to sell, convert or transfer assets (known as appropriation), including shares, in order to meet debts and, in some cases, to pay out legacies to beneficiaries. Inexperienced executors may be selling or transferring shares at too low a value without realising that they could be entitled to reclaim some IHT as a result
Where a sale or transfer of shares or other qualifying investments is made within one year of death at a value less than they had for probate, IHT can be recalculated using the lower value. Many share values are well down on more on a year ago, especially given the current Euro-panic in the markets. This can mean there’s an opportunity for substantial tax savings
Y died on October 15 2011 leaving within his estate shares worth £50,000 on which IHT of £20,000 (£50,000 x 40% IHT = £20,000) was paid. The shares are now worth £40,000. If they are sold by October 14 2012 the executors can claim a reduction of IHT of £4,000 (£50,000 - £40,000 = £10,000 x 40%)
There’s an anti-avoidance rule to stop executors from dumping shares to create a loss, claiming back IHT, and then buying back the same or different shares. This rule applies to purchases made within two months of the last sale
In addition, to calculate the loss, you have to include all the investments sold or transferred within the twelve months since death. That means if you sell some for more than probate value, the profit will reduce the loss on which you can claim the IHT reduction
So if you need to sell or transfer shares that have a value higher than at probate, defer the sale until after twelve months have elapsed since the deceased died
And remember , if you think you’ve missed out on claiming an IHT reduction on property or qualifying investments losses, think again. Currently you have six years in which to make a claim