Families may save 'thousands of pounds' in Inheritance Tax by claiming cash back from HMRC

House prices across the UK have fallen in recent months: between June and July 2021, house prices in the UK fell 3.7 percent and were down 4.5 percent in England. This could have a big impact on estate planning as families will be able to reclaim Inheritance Tax if the value of their home falls between the date of death and a sale.

NFU Mutual explained the tax is based on the value of property at death and If the property is sold by the executors within four years of death at a lower value, overpaid IHT can be reclaimed from the Government.

This could end up affecting thousands as new FOI figures showed 3,630 families reclaimed IHT this way in 2020/21.

Even more reclaims could be to come as property prices “slump”, and the same rules could be utilised for losses seen on share sales.

The tax is paid on estates where the total value is over £325,000, with a tax rate of 40 percent charged on the parts of the estate valued over that threshold.

While IHT is designed to only impact wealthy families, decades of rising property prices has pushed more families into its threshold.

© GETTY Inheritance tax

IHT reclaims on property

While the IHT tax rebate will be welcomed by many families, it should be remembered it is not issued automatically. Families will have to “proactively” reclaim what they’re owed.

Sean McCann, a Chartered Financial Planner at NFU Mutual, said: “With house prices starting to dip, it’s important families are aware of this ability to reclaim Inheritance Tax that could save them thousands of pounds.

“Inheritance Tax is assessed on the value of a person’s estate on the date of death and the tax must normally be paid within six months. But if property is sold within four years of death for a lower price, the overpaid Inheritance Tax can be reclaimed.

“The number of these reclaims dipped last year due to the buoyant housing market, but are likely to increase if house prices continue to fall. With Inheritance Tax allowances frozen for the next five years, more and more families are being caught in the net. It’s important to take advice to ensure your family doesn’t pay more tax than they need to.”

While IHT reclaims for property values topped over 3,000 last year, this was a drop of 26 percent compared to the year before, suggesting many families may be unaware of this option.


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IHT reclaims on loss of shares

Families can also reclaim overpaid Inheritance Tax on the value of qualifying shares and investments sold by the executors at a lower value in the 12 months after death. Another Freedom of Information request showed the number of people reclaiming Inheritance Tax on loss of shares increased last tax year to 2,240.

Mr McCann continued: “These figures show more people are becoming aware that they can reclaim overpaid Inheritance Tax when share prices fall.

“The increase in claims is due to the fall in share values we saw as a result of the coronavirus pandemic in the early part of 2020. Many families are unaware they can reclaim overpaid Inheritance Tax when share values fall.”

How to reclaim Inheritance Tax

Families can submit an IHT35 form to reclaim on loss of shares and an IHT38 form to reclaim on loss of land and property. Both of these forms can be found on the Government’s website and they must be submitted to HMRC.

However, NFU Mutual warned “there are a number of traps to look out for” when making these requests.

© EXPRESS House prices

The sale of the shares or property must be made by the “appropriate person” who is normally the executor. If the shares or property have been passed to members of the family who then sell at a loss they cannot reclaim.

Additionally, all the shares sold by the executor are aggregated, so if some have gone up in value this will reduce the amount of IHT that can be reclaimed.

Fortunately, NFU Mutual explained there is “one way around this”. Where applicable, the investments that have gone up in value can be passed on to beneficiaries, while only those that have fallen in value can be sold.

This would maximize the amount of money reclaimed from the Government.

Is it possible to reduce Inheritance Tax bills?

It is possible to reduce how much IHT is paid but this is a complicated area which usually requires specialist guidance and advice.

However, Money Helper, the public advisory service, explains families can reduce their IHT bills by:

  • Leaving a legacy to charity
  • Putting your assets into a trust for heirs
  • Leaving your estate to a spouse or civil partner
  • Paying into a pension instead of a savings account
  • Regularly giving away up to £3,000 a year in gifts

More families than ever will likely want to utilise these options as IHT becomes increasingly important for the Government. Between April and August, the state collected £2.7billion in Inheritance Tax, an increase of £700million when compared to the same period last year.

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