Inheritance tax refunds set to rise in house market slump: Many families may have overpaid as selling prices undershoot valuations at time of death

A rising number of families could qualify for inheritance tax refunds on property sales, as prices slump below valuations when their loved ones died.

Overpaid inheritance tax must be claimed proactively from HMRC, but you can recover thousands of pounds if you sell a property for less than anticipated within four years of a death.

Inheritance tax is also refunded on investment losses, but only if you sell for a lower value within the first year after a bereavement.

Overpaid inheritance tax:  You can claim a refund if you end up selling for less la

Interest rates hikes to combat inflation have sent mortgage rates soaring, which is dampening property prices for all sellers, including those selling a deceased relative’s former home.

The latest Nationwide house price index estimated that prices fell 3.5 per cent year-on-year in June.

Inheritance tax must usually be paid within six months of a death, and it is 40 per cent on the portion of someone’s estate that exceeds certain thresholds.

These are £325,000 if you are single, £650,000 jointly if you are married or in a civil partnership, or a joint £1million if you pass property to your direct descendants.

The Conservatives are reportedly considering including a pledge to abolish inheritance tax in their next election manifesto in a bid to drum up votes.

> How inheritance tax works and 10 ways to relieve the burden on your loved ones

‘Although thousands of families reclaim overpaid inheritance tax every year, it’s likely that many miss out,’ says Sean McCann, chartered financial planner at NFU Mutual.

‘In a rising market reclaims are normally made when a property is overvalued on the inheritance tax return or its condition deteriorated between the time of death and subsequent sale.

‘The current downturn in the housing market is likely to lead to even more bereaved families selling property at a lower price than the value at which inheritance tax was paid.

‘It’s crucial to remember that the refunds need to be actively claimed as HMRC won’t automatically reimburse the estate.’

A freedom of information request by NFU Mutual found around 3,000 families claimed a refund on overpaid inheritance tax on property and land in 2022/2023, and 2,000 on investment losses.

The total number of claims for overpaid inheritance tax was up 22 per cent on the previous year.

How to claim an inheritance tax refund

‘Inheritance tax is based on the value of assets on the date of death and must normally be paid within six months.’ says McCann.

‘If the executors or personal representatives subsequently sell a property at a lower price within four years of the death, or shares or other qualifying investments within one year, they can reclaim inheritance tax.

McCann says you can seek advice from an accountant or adviser, but refund claims can only be made by the ‘appropriate person’ or persons responsible for paying the inheritance tax.

So, this means an executor if there was a will, or administrator if someone dies intestate.

Claims for refunds of inheritance tax on property and on shares must be made separately, notes Ammo Kambo, a financial planner at wealth manager RBC Brewin Dolphin.

‘Losses and gains on property cannot be used against losses/gains on shares.’

Property refund claims

‘If executors sell land or property within three years of death – four years if death occurred after 16 March 1990 – they are able to make a claim that the sale price be used rather than the death value,’ says Kambo.

Sean McCann: Although thousands of families reclaim overpaid inheritance tax every year, it’s likely that many miss out

‘If there are several sales, relief can only be claimed on the net loss of total sales of land or property.

‘If land/property is sold to a beneficiary or one of their relatives, it may not be possible to make this claim.’

What info do you need to gather and where do you apply for a refund?

McCann offers the following checklist:

– You will need to include every sale of land or property sold by the ‘appropriate person’ in the four years after death.

– You will need to include the value of the property at the date of death, the sale value and the name of the purchaser.

– A claim can be submitted up to seven years after the death (although sales must be in the four years after death)

– HMRC advise that you shouldn’t make a claim until all the land and property to be sold by the ‘appropriate person’ has been sold.

– For claims on property that has fallen in value use inheritance tax form IHT38.

Shares and other investment refunds

‘If the executors sell any quoted shares of the deceased’s estate within 12 months of death, they can make a claim that the total sale price should be used rather than the value of the shares at the date of death,’ says Kambo.

‘All shares sold within 12 months of death must be revalued in this way.

‘You cannot choose to make a claim only on the shares that have fallen in value – the executors need to have suffered an overall loss in order to claim the relief.’

McCann says it is important to check if you have overpaid inheritance tax during times of stock market volatility, because reclaims can amount to thousands of pounds.

He notes that because all qualifying investments sold by the executor in the 12 months following death have to be included in the claim, not just those that have fallen in value, if some have increased in value this will reduce your refund.

McCann says under these circumstances it may be more advantageous for executors to pass the shares or investments that have increased in value direct to the beneficiaries rather than sell them.

Ammo Kambo: If land or property is sold to a beneficiary or one of their relatives, it may not be possible to claim an IHT refund

‘This means you make a claim only for those shares that have fallen in value, maximising the amount reclaimed. This is common practice. I’m not aware of cases where this has been challenged.

‘Where a challenge is more likely is where property is sold at under market value, particularly to family members.’

Legal and money experts have recently warned about probate delays leaving many bereaved families out of pocket on reclaiming tax on investment losses because they breach the one-year deadline.

Applying for probate is a vital step to gain control over an estate after someone dies, allowing executors to access bank accounts, settle debts and sort out bequests.

McCann says: ‘In order to sell property, shares or other qualifying investments, the executors will need the grant of probate.

‘Probate delays eat into the 12-month window available to executors to sell shares or other qualifying investments. There is a danger that executors could run out of road.’

What info do you need to gather and where do you apply for a refund?

McCann offers the following checklist:

– You will need to include every sale of a ‘qualifying investment’ sold in the 12 months after death (not just those sold at a loss).

– ‘Qualifying investments’ include shares listed on a recognised stock exchange at the date of death, UK Government stock (gilts, or UK government bonds) and holdings in unit trusts.

– You will need to include the value at the date of death and the sale value.

– A claim can be submitted up to five years after the death (although sales must be in the 12 months after death)

– For claims on shares or other qualifying investments use inheritance tax form IHT35