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Claiming Back Overpaid IHT on Property Sales

Claiming Back Overpaid IHT on Property Sales
There is some good news for anyone who has paid out inheritance tax (IHT) on a home that has later fallen in value – you can go back to the taxman for a refund!

 

The problem with IHT is that the tax on an inheritance is generally due no later than 12 months after the end of the month in which a death occurred.

 

This means a lot of people paid IHT on the value of the home at the height of the housing bubble, only to see the bubble suddenly burst and prices plummet. If the rules had let payment ride for a couple of months, the tax due would have added up to a lot less.

 

Who Can Claim?

Many IHT payers are unaware that they can reclaim tax providing certain points to prove are met according to 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
  • Within 48 months of the death
  • For a value that is less 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.

 

Example

The HM Revenue and Customs IHT manual for tax inspectors gives a helpful example:

 

“T died in August 1988. T’s house was valued for probate at £200,000. T had no other interests in land. In December 1990, T’s executors sold the house for £150,000 to someone who was not related to T. The executors claimed sale of land relief and the date of death value of the house for IHT purposes was reduced to £150,000.”

 

With the current IHT rate at 40% and assuming the value of the property is above the IHT threshold, claiming to reduce the value by £50,000 saves £20,000 IHT.

 

Beware of claiming without considering the effect of the relief on the sale of any other land or property. If a claim is made and the estate has sold other land or buildings at more than the date of death value, the door is open for the taxman to ask for more IHT.

 

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.