Reclaiming overpaid inheritance tax

Inheritance tax (IHT) is expected to raise £37 billion over the next five years – £10 billion more than in the past five years. But IHT is sometimes overpaid and it is reported that families have made 32,000 claims for IHT repayments over the past six years.

Much of the increase in receipts is the result of rising property values and the continuing freeze in the nil-rate band of £325,000 and residence nil rate band of £175,000.

IHT is charged on the value of an estate at the date of death and the tax must normally be paid within six months.

However if the estate’s executors sell property or shares below the valuation at death, they can revise the calculation and reclaim the overpaid tax.

Refunds are available for property sold within four years of the death and for shares and other qualifying investments sold within 12 months of death. The revision is not automatic and has to be claimed. 

Monitor values

Valuation of property at the date of death needs to be realistic, but the value may fall before sale, especially if it has been left empty and has deteriorated. Of the 32,000 claims for repayments, more than 22,000 were for property. 

Where shares are concerned, market volatility may result in investments being sold at less than their valuation on the IHT return.

Refund claims have to include all the shares sold by the executors in the calculation, not only those sold at a loss. If some have increased in value, that will reduce the amount of IHT that can be claimed. Executors should instead consider passing shares that have increased in value directly to the beneficiaries rather than selling them. 

Where share values have fallen, executors may consider deliberately selling at a loss to claim the IHT refund, but this may result in missing out on a subsequent recovery in value.

An anti-avoidance rule prevents people selling shares at a loss, claiming the IHT refund and then buying back the same shares within two months. 

The revised value for IHT will also apply to capital gains tax (CGT) where a refund is claimed, preventing the executors claiming a CGT loss to set against CGT on other gains. Their CGT loss claim will generally be limited to the costs of sale. 

As more estates become subject to IHT it is important for executors to keep an eye on asset values and act where the circumstances are advantageous.

To discuss your position with regard to the IHT that may be payable from your estate, or if you think any of the above applies to an estate where you were either executor or beneficiary, get in touch and we will review the situation. Email Emily to arrange a consultation.

>Read more: Inheritance tax – who does it apply to and how much could my estate pay?