If you’ve inherited a property that took some time to sell, you may be due a refund from the taxman.
When someone dies, the amount of inheritance tax (IHT) due on their estate is calculated using provisionary valuations for their assets (for example, a house or shares). Tax is then paid from the estate using the resulting provisionary calculation. However, if the property takes a while to sell and house prices go down in the meantime, it may sell for less than the value given to the taxman previously. This means that less inheritance tax is due than was paid, and you may be able to reclaim the difference. The claim must be made within four years.
Which? report that the economic uncertainty caused by Brexit has undoubtedly affected the housing market, with house prices falling in some areas and fewer sales having taken place so far this year compared to the same time last year. But does this mean people are claiming back the tax they’ve overpaid?
According to NFU Mutual, there has been an 86% increase in property-related refunds from the 2016/17 tax year to the 2017/18 tax year, and a further 11% increase in the year to April. But experts think these claims are likely to be a drop in the ocean compared to the number that could be made, if people knew they were eligible. It is not well known that where the property sale price is less than the provisional valuation given for the IHT calculation, a rebate can be claimed – and unsurprisingly, the taxman doesn’t send this automatically!
NFU thinks that most of the refunds will be where property prices are higher and estates are therefore more likely to be liable for inheritance tax. Everyone gets a £325,000 inheritance tax allowance and on top of that, there is the Residence Nil Rate Band available (currently £150,000 – rising to £175,000 in 2020/21) where the main residence is left to a ‘direct descendant’ (such as a child or grandchild). The average house price in September 2019 was £474,601 for London, £329,197 for the South East and £291,993 for the East of England – property values that could quite easily push someone’s whole estate over the available allowances.
The UK House Price Index shows drops in several areas, with a fall of 1.2% in one month alone reported for the East Midlands. The average time to sell is 4.2 months but Brexit and the election are causing uncertainty that is likely to impact this further. If a property was valued at £900k on death and later sold for just £873k (i.e. 3% less), a substantial refund of the tax overpaid would be due:
Valued at 900k:
IHT allowance if left to direct descendant : £475,000
Balance : £425,000 x 40% tax = £170,000 inheritance tax due
Sold for 873k:
IHT allowance if left to direct descendant : £475,000
Balance : £398,000 x 40% tax = £159,200 inheritance tax due
Refund due: £10,800
A fall of 3% in the average 4.2 months it takes to sell a house is not unrealistic. Prices in parts of Surrey have dropped by 4.5% over two years, for example – and prices in Oxford have fallen by 5.5% over the same period.
If you believe you may be due a refund of inheritance tax and would like some advice, get in touch with our team.