If you inherited a property that you then sold for less than the property was valued upon death, you could get a refund for the difference of the Inheritance Tax (IHT).
IHT is charged at 40% over the £325,000 nil-rate band allowance, so the figures can be significant. There’s an additional ‘residence nil-rate band’, which has risen to £175,000 in April 2020, for those passing on property to direct descendants (which includes children, grandchildren, stepchildren, adopted and foster children, and great-grandchildren) giving a total IHT free allowance of £500,000.
An IHT refund can only be claimed if the sale of the property has taken place within four years of the death and the sale price must be at least 5% or £1,000 (whichever is lower) different from the value on death. This post mortem relief is subject to certain conditions and it is necessary to consider other sales made within the post-death period even those sales occurring at a gain.
HMRC will not automatically give you a refund so you must request one, and to do so you must be either the person who paid the Inheritance Tax or be who someone had an obligation to pay it, e.g. an executor or trustee.
The way an IHT refund is calculated is as follows:
If the property was valued at £525,000 upon death (and the additional nil-rate band couldn’t be claimed as the recipient wasn’t a direct descendant) then £80,000 would have been paid:
£525,000 valuation price – £325,000 nil-rate band allowance = £200,000.
40% of £200,000 = £80,000 IHT payable
If the property was sold within four years for £500,000 then a £10,000 refund could be claimed on the difference of the IHT due on the valuation and sale price:
£500,000 sale price – £325,000 nil-rate band allowance = £175,000.
40% of £175,000 = £70,000 IHT payable
Therefore a refund of £10,000
IHT refunds are increasing each year as more people become aware of them. In the 2018-19 tax year, 4,516 people successfully received an Inheritance Tax refund, which was more than double the previous tax year of 2,177.
Given the current economic uncertainty with the Coronavirus pandemic, it is worth pursuing if you believe you may have a claim for a refund.