In the first 11 months of the 2024/25 tax year, HMRC collected a record £7.6 billion in inheritance tax receipts, surpassing last year’s full year total of £7.5 billion. This was driven up by frozen inheritance tax (IHT) thresholds and the rise of property prices over time.
It is not widely known, however, that you could be entitled to an inheritance tax refund if the value of your property, or other assets, has gone down when you come to sell.
In recent years, the value of IHT refunds, particularly for property, has risen following the housing market slump that followed the pandemic.
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When is inheritance tax payable?
Inheritance tax is payable if the value of your estate on death exceeds the tax-free limits afforded by the Government.
Everyone has a tax-free limit currently set at £325,000 – known as the nil-rate band. If your estate is worth more than this nil-rate band, HMRC can potentially take 40% of the excess.
The Government also gives families an extra allowance, known as the residence nil-rate band, of £175,000 to those who leave their home to children or grandchildren.
By combining the nil-rate band with the residence nil-rate band you could have a total tax-free allowance of £500,000. If you are married or in a civil partnership, you can leave everything to your other half with no tax to pay.
A surviving spouse also has both allowances so, assuming a home is left to children or grandchildren, it means the surviving spouse will have a combined tax-free and property limit of £1 million when they die.
The tax-free limits have been frozen since 2009 and both the nil-rate band and the residence nil-rate band will remain so until 2030. Furthermore, from April 2027 pensions will be included in the IHT calculation.
“These changes mean more people will be caught in the inheritance tax net”, said Sean McCann, chartered financial planner at NFU Mutual.
Why you might be due an inheritance tax refund
Not many people know they could be able to claim an IHT refund for up to four years after they have paid it.
When someone dies, their estate is valued for IHT purposes on the basis of what it was worth on the day they died. If IHT is owed, then it must be paid within six months.
But if assets within the estate are later sold for less than their initial value, you can claim a tax refund.
If you sell shares for less than their initial value within 12 months you can claim an IHT refund. For the sale of property, it’s within four years and a lot can happen in the housing market over a four-year period.
Cast your mind back almost two years ago and house prices were going in reverse as a surge in mortgage rates caused a dramatic drop in buyer demand.
House prices have at last stabilised with slight monthly increases recorded and an average annual rise of 3.9% in February according to the Nationwide House Price Index.
But not all regions’ property prices have recovered at the same speed.
This means if the property was valued prior to 2023 and was sold during the downturn or before prices had recovered, within four years, you could be eligible for a refund.
Are you entitled to claim an inheritance tax refund?
If an estate property is sold for less than the value declared at the time of owner died, the estate may be eligible for an inheritance tax refund through the Loss on Sale of Land relief if certain criteria are met.
This relief allows some of the IHT originally paid based on the higher probate valuation to be refunded. However, if the relief does not apply because the sale does not meet certain conditions, you will not receive a rebate.
For example, the sale of the property and any reclaim for tax paid must be made by the executors of the estate.
The loss must equate to more than £1,000 or 5% of the valuation at death, whichever is lower. And a refund is also not available if the sale was made to a beneficiary or one of their relatives.
There were more than 7,000 reclaims for overpaid inheritance tax in 2023/24, up 38% on the previous year, according to data obtained from a Freedom of Information request by financial advisers at NFU Mutual.
Of these, almost 5,000 families applied for refund after selling property for a lower price than it was initially valued on death.
“It is not surprising to see such a significant increase in property reclaims during the last financial year (23/24), with 2023 seeing a widespread slowdown in the housing market,” said Mr McCann.
“Since then, the market has stabilised but in some regions house prices remain well below their peak.”
How do you calculate your inheritance tax refund?
Here’s an illustration of how you calculate your IHT refund:
Your estate, which in this instance consists of just a property, is valued at £500,000 on your death. You have never married, nor do you have any children and you have made no lifetime gifts.
In your will, you leave your property to a friend. This means that only the Nil Rate Band is available when calculating the estate’s IHT liability, which is currently £325,000 charged at 0%.
The value of your estate that exceeds this sum will attract 40% inheritance which means the estate has an IHT liability of £70,000 to pay (£500,000 – £325,000 x 40%).
Your property ultimately sells for £400,000 and contracts for sale are exchanged within 4 years of the date of death. This means the estate’s IHT liability is £30,000 which means a £40,000 refund is payable.
Tom Newton, senior associate at law firm Nelsons in the wills and probate team, added: “Changes in condition of the property or damage to it since it was valued for probate purposes or the method in which the property is sold, for example by auction compared to the open market, may cause the sale value of the property to be lower than it was initially valued.”
Interest is typically paid by HMRC on the overpaid amount and is usually calculated from the date the overpayment occurred until the date the repayment is issued by HMRC.
How to claim an inheritance tax refund
An IHT refund claim can be submitted up to seven years after the death – though the property sale must be in the four years after death.
It is your responsibility to proactively claim a refund from HMRC.
Inheritance tax is also refunded on investment losses, but only if you sell for a lower value within the first year after the death of a relative.
You claim an IHT refund by filling in the IHT38 form from Gov.uk.
You’ll be asked questions such as the date of the sale, gross sale proceeds, the name of the buyers and whether you sold if for less than the best price that you could have achieved.
How long does an inheritance tax refund take?
From the point of submission of form IHT38, refunds can take approximately three to nine months to be processed and paid by HMRC.
Interest is typically paid by HMRC on the overpaid amount and is usually calculated from the date the overpayment occurred until the date the repayment is issued by HMRC.
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