When an individual who owns property passes away, the property and other assets they leave behind are taxed based on their value at the date of that person’s death. This is known as the ‘probate value’. However, if the property is sold at a price lower than the probate value, inheritance tax relief can be obtained from HMRC.
When will this relief become available?
Relief from Inheritance Tax can be claimed where an interest in land is sold within four years of the deceased’s death date at a lower value than the value declared as part of the application for probate. A ‘sale’ for these purposes is when contracts are exchanged by the person liable to pay the IHT (which is usually the personal representatives but could also be a beneficiary or a trustee).
When will the relief not be available?
However, the relief will not be available where the loss on sale is the lower of:
• 5% of the probate value, and
• £1,000.
The relief will also not be available if the sale is made to a legatee or to the legatee’s registered legal partner, child or grandchild.
Why PRs may claim the inheritance tax relief
Changes in the condition of the property or damage to it since it was valued for probate purposes, or the method in which the property is sold (i.e. open market sale against public auction), may cause the sale value of the property to be lower than the probate value.
Example
For example, Peter has a net estate worth £500,000, which includes a residential property. Peter has never married, does not have any children, and he has made no lifetime gifts. He leaves a valid Will, and his entire estate passes to his friend. This means that only the Nil Rate Band (i.e. the sum charged to Inheritance Tax at 0%, currently £325,000 ) is available to his estate when calculating the estate’s Inheritance tax liability. The value of his estate that exceeds this sum will be charged to inheritance tax at 40%. Peter’s property is valued at £400,000 for probate purposes.
Peter’s Personal Representatives calculate his Inheritance Tax liability and pay the following sum of tax:
- Value of Peter’s estate less the available nil rate band: £500,000 – £325,000 = £175,000
- Tax due: £175,000 at 40% = £70,000
Ultimately, Peter’s property sells for £300,000, and contracts for sale are exchanged within 4 years of the date of death. In these circumstances, the estate’s Inheritance Tax liability is as follows:
– Value of Peter’s estate less the available nil rate band: £400,000 – £325,000 = £75,000
– Tax due: £75,000 at 40% = £30,000.
Form IHT38 would be submitted to HMRC to claim repayment of the £40,000 of tax previously paid that is now no longer due as a result of the decrease in the value of the property.
Interest is typically paid by HMRC on the overpaid amount and is usually calculated from the date the overpayment occurred until the date the repayment is issued by HMRC.
How long does the inheritance tax relief take to process?
In our experience, from the point of submission of form IHT38, refunds are taking approximately 3-9 months to be processed and paid by HMRC.
How can we help
Tom Newton is a Senior Associate in our expert Wills & Probate team, specialising in Wills, administration of estates, grants of Probate, and Powers of Attorney.
Should you require any advice, please contact Tom or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
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