Inheritance tax bright spot amid property gloom

Tuesday, August 14, 2012 | Posted by: Chris Tysoe
Categories: Personal, Protecting your wealth | Tags: tax, property, inheritance tax, IHT, inheritance, house, Chris Tysoe, rebate, probate, estate, fall in value

Could you be entitled to a tax rebate on inherited property? Chris Tysoe, Tax Manager, highlights a small token of relief for those who have had to sell an inherited property for less than it was worth when they inherited it.

Without meaning to sound too depressing, there has been a great deal of coverage recently regarding the eurozone crisis, the threat of a triple-dip recession and, of course, our struggling property market, with house prices now a reported 2.6% lower than a year ago.

As prices continue to fall, however, we are reminded of a lesser-known inheritance tax (IHT) relief that may yet offer some small token of comfort, with estimates suggesting that up to £90 million in tax could be reclaimable – in many cases by individuals unaware that they may be eligible.

The relief available
IHT is payable on the market value of property at the date of death – known as the probate value. But where a property is subsequently sold for less than the probate value a few years later, relief at 40% of the difference may be available.

Here’s an illustration of how much relief may be payable:

IHT is payable on transfers of property at 40%. This equates to a £400,000 bill on a property valued (at probate) at £1 million. However, where the conditions are met, if that property is subsequently sold for only £850,000, then a potential repayment of up to £60,000 may be due.

So what’s the catch?
As ever, strict conditions apply:

• The sale must take place broadly within four years of the date of death.
• The fall in value must equate to at least 5% of its probate value, or £1,000, whichever is the smaller number.
• Where a claim is made, all properties within the estate are re-valued to the date of sale value. This could give rise to additional IHT liabilities and complications if any other properties in the estate have since been sold for more than their own original probate value.
• Significantly, any claim for relief must be made, not by the beneficiaries receiving the property, but by the trustees or personal representatives of the estate. While in many cases this will be the same individuals, strictly speaking it would be the estate that receives the refund and not necessarily the beneficiary of the disposed property.

There are also important capital gains tax (CGT) implications to consider, as any claim is likely to impact on the base cost used for CGT purposes. Although for many people this is unlikely to result in CGT becoming payable, it may worsen the beneficiaries’ overall tax position.

A real opportunity
As the UK property market continues to stutter, this relatively unknown relief may offer a real, and potentially significant, opportunity for a possibly unexpected rebate. While this is not quite an ‘every cloud…’ type message, it is certainly worth spreading the word that the opportunity exists, so that those affected can claim some small relief for the uncertainty.

Furthermore, as stamp duty land tax (SDLT) is set to increase (see our previous post on the proposed new mansion tax ‘lite’), there is a real concern that house prices at the top end of the market – above £2 million in particular – may be adversely affected. This, too, could yet generate more potential for claims.

If you think you might be eligible for relief or are sitting on recently inherited property that has been affected by the uncertain market, please feel free to get in contact with our advisers to discuss your options or how you might claim your slice of the rumoured £90 million in overpayments. 

You might also find these posts useful:

* Tax traps: When HMRC changes its own guidance
* Mansion tax ‘lite’ set to bring CGT, annual charges and higher stamp duty
* Avoiding inheritance tax with business property relief? Beware these nightmare scenarios…