Claiming back Inheritance Tax (IHT) if house prices have dropped

Families and friends of someone who has died that have paid out Inheritance Tax (IHT) on land or a home that was sold for less than the value of the property when they took over ownership can reclaim some or all of the tax they paid.

Many property sellers are unaware that they can benefit from this little known IHT tax break by making a claim under the little-known ‘sale of land relief rules’.

This tax strategy that could save some taxpayers thousands of pounds is detailed on the HM Revenue and Customs (HMRC) web site, but the catch is unless you know about the rules, you don’t know where to look and the taxman won’t tell you.

Basically, sale of land relief rules say providing the date of death was four years ago or less, if the valuation for IHT was higher than the sale price, the taxpayer can switch the values.

The advantage to the taxpayer is if the property has dropped in price during that time, IHT is paid on the lower value and the difference between the tax paid to HMRC and the tax due on the new valuation must be refunded with interest.

Claims are only accepted if the sale value is either £1,000 or 5% below the value on death, whichever is the least.

Don’t worry if the property value went up – the taxman cannot come after you for more cash.

But there is a catch.

If more than one property was inherited and sold but only one valuation has gone down and the others have gone up, then all the property is reassessed for IHT and the taxpayer could end up paying more.

House price rise figures are misleading – although many homes have increased in value over the past year, many are still valued at below their peak of four years ago.

According to guidance given to tax inspectors, sale of land relief is calculated like this:

T died in August 2007. T’s house was part of his estate that was valued at £200,000 to calculate Inheritance Tax.

In December 2009, T’s executors sold the house on the open market for £150,000.

The executors claimed sale of land relief. The date of death value of the house for IHT was switched with the sale price to bring down the taxable amount for IHT to £150,000.

Because the £50,000 was more than £1,000 or 5% of the value on death (£10,000), the claim was allowed giving T’s heirs a rebate of £50,000 x 40% in Inheritance Tax, or £20,000.

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