Falling house prices mean Inheritance Tax refunds for many


The issue

London house prices have dropped so much in value over the past year that anyone who has inherited a property may be due an Inheritance Tax (‘IHT’) refund. This all depends on whether a certain trigger point is reached but HMRC (unsurprisingly) will not tell you if this has happened. Although the legislation does not set out a specific trigger point, HMRC’s form states that this is a fall of at least 5% in the property price or £1,000 (whichever is lower) in the four years after the former owner’s death.

Significantly, London house prices are running well ahead of this trigger point. The latest official data from the Land Registry shows house prices in the capital dropped 4.4% in the year to the end of May 2019.
A year ago, the average house was valued at £478,485. Now, the same property is estimated to be worth £457,451. The difference in IHT charged at 40% on the value of an average property is therefore £21,034 and any reclaims would also enjoy interest!

Also take a look at the Land Registry for an idea of how refunds might pan out for certain properties:

Property Type
May 2019
May 2018
Difference (%)
IHT refund
Detached£847,998£903,088-6.1£22,036
Semi-detached£558,559£581,868-4.0£9,324
Terraced£482,970£497,350-2.9£5,752
Flat/Maisonette£399,012£420,076-5.0£8,426
All£457,471£478,485-4.4£8,406


Claiming a refund

This tax break arises because IHT is paid on the probate value of an estate. IHT is typically calculated and paid within a year of someone’s death. However selling the assets, like property, can take much longer, and the price realised may be less than the value originally quoted to HMRC – especially in a falling market. If a property is sold at a loss against probate value within four years of the former owner’s death, the refund is triggered. The claim is made by completing and filing HMRC Form IHT38.

Final comment

In the current property market this is a very important relief which will be relevant for many beneficiaries. Also, counterintuitively, it may sometimes be advisable to use this reclaim mechanism when a property has increased in value following death. This would be relevant if the inheritance tax rate was less than the capital gains tax rate. This could be relevant in cases where a property benefits from 50% business property relief (‘BPR’). Here, this reclaim mechanism would seemingly give us the opportunity to decrease a 28% gain down to 20% or less. Cheeky!

 

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