The Times Online reported on Saturday that sellers who inherited properties are successfully claiming tens of millions of pounds from the taxman by arguing that the homes have fallen in value by the time they were sold.
The time between the valuation of a property for inheritance tax (IHT) purposes and their sale is allowing some people to use a relatively little-known procedure to reclaim some of the tax paid. This can happen up to four years after an estate is wound up.
NFU Mutual says that the number of property-related refunds granted by HMRC went up 86 per cent, from 2,177 to 4,052, from the 2016-17 tax year to the year after, then 11 per cent to 4,516 in the year to April.
Experts say that these refunds, likely to be worth thousands of pounds, would be a “drop in the ocean” compared with the amount that people could claim because many do not know that they are eligible.
IHT is charged on the value of assets at someone’s death and must be paid before the estate can be handed over to the family. It is charged at 40 per cent on an estate’s value above the £325,000 nil-rate band, unless the deceased leaves their main home to a family member, in which case there is an additional £150,000 residence allowance.
However, if you sell a property for less than its IHT valuation within four years of paying the tax, you can reclaim the tax you have overpaid by filling in an IHT38 form. Tax experts have accused the tax office of failing to publicise it.
George Bull, a senior tax partner at the accountancy firm RSM, says: “For more valuable properties this is becoming a significant issue and the level of public knowledge in this area is poor.”
Anthony Nixon from Irwin Mitchell, a law firm, agrees. “The revenue never tell you where the opportunities are, they only tell you where tax applies.”
NFU Mutual did a series of calculations for Times Money to show how much you could claim back if you had paid inheritance tax, but then accepted a cut-price offer on your loved one’s house. In London the average price fell 2.5 per cent between August 2017 and 2019, according to the Land Registry. This would reduce the value of a £1 million house to £975,000.
The original inheritance tax bill would have been reduced from £270,000 to £260,000. If the property had been left to a direct descendant in 2017 when the residence allowance was £100,000, the original bill of £230,000 would fall to £220,000.
In Cobham, Surrey, where the average price fell 4.5 per cent, a £1 million house would typically have fallen in value to £955,000, reducing an inheritance tax burden from £270,000 to £252,000 and giving a potential refund of £18,000. If the property was left to family, the tax payable would fall from £230,000 to £212,000.
HMRC says: “The IHT calculation is made on the value at death rather than on sale proceeds, when the price of an asset may have increased or decreased. Taxpayers may be able to apply for a refund if land, including residential property, is later sold at a lower price.”