Are you due a refund on your inheritance tax bill?

If you’ve paid inheritance tax recently, you may well be due some of your money back. Here’s how to tell

When someone dies their estate is valued for inheritance tax (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 are sold for less than that initial value within 12 months you can claim an IHT refund. 

Research from NFU Mutual shows that 1,851 families reclaimed overpaid IHT on shares in 2019-2020, compared to just 858 in the 2017-2018 tax year. “These figures show that more people are becoming aware they can reclaim overpaid IHT,” says Sean McCann, a chartered financial planner at NFU Mutual in The Sunday Times. “After recent falls in the stockmarket it’s likely that many more bereaved families will be able to benefit.”

IHT is levied at 40% on estates worth more than £325,000. Married couples and people in civil partnerships can pass their assets to their other halves without incurring any IHT. When the surviving partner dies, they can then use both IHT allowances, which means they can pass on £650,000 without incurring IHT.

There is also a relatively new allowance for your home. Known as the “residence nil rate band” you can pass up to £175,000 (this rose from £150,000 in April 2020) of the value of your family home onto “direct descendants”. A married couple could therefore pass on a home worth up to £350,000, plus additional assets worth £650,000, without attracting IHT.

Two key catches

There are some catches to IHT refunds on sold assets. If the shares have already been inherited, then the beneficiary cannot sell them and claim a refund. They have to be sold by the executor of the estate. Furthermore, shares are aggregated when valued for IHT. This means if the value of some shares has risen it will reduce the amount of tax that can be reclaimed. Nevertheless, the executor could pass on stocks that have risen in value to beneficiaries and sell those that have fallen in order to claim a refund.

It’s also worth considering if you want to crystallise your losses in order to claim a tax refund. “The double-digit stock market falls year-to-date are currently only paper losses and those losses aren’t locked in until the assets are converted to cash, so selling may not be the right approach if you can allow the shares time to recover,” says Rachael Griffin, a financial planning expert at Quilter, on This Is Money.

Many people may also be able to claim a tax refund on property. “IHT can also be reclaimed when houses are sold at a lower value within four years of the death,” says McCann. “If coronavirus affects house prices, it’s important families are aware of this.” You can claim an IHT refund by filling in IHT38 form which can be downloaded from Gov.uk

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