IHT Refunds – Check So You Don’t Miss Out

Inheritance Tax (IHT) is a concern for many families. The nil rate band has remained static for over ten years now, while property and share prices have continued to rise. This means that something that used to be the sole concern of the very wealthy is now affecting more modest estates.

23rdt December

There are a number of planning opportunities to reduce your estate for IHT purposes. But if someone has recently passed away, does that mean it’s too late?

This guide explores a little known loophole that could reduce IHT after death.

A Brief Guide to Inheritance Tax
Inheritance Tax works as follows:

When Can You Claim a Refund?
Your IHT liability will depend on the value of your assets at the date of death. This is known as the probate value.

Some assets, such as shares or investment accounts, will be easy to value as the prices are published daily. However, prices can fluctuate rapidly, so the value may vary from one day to the next.

Property and valuables may be trickier to appraise and will depend, to an extent, on someone’s opinion.

Beneficiaries of a will normally want to sell the assets they inherit. This can either be done by the executors or by the beneficiaries themselves once the asset is directly owned by them.

If the asset is sold for a lower value than indicated at probate, it may be possible to claim a refund on the excess tax paid.

For example, if you inherited a house valued at £400,000, the IHT payable would be £160,000, assuming the nil rate band had already been used up. If you sold the property six months later for £300,000, you could potentially claim a refund of up to £40,000.

A few conditions apply:

When selling an investment portfolio, the claim must relate to the whole portfolio. You can’t simply pick and choose the shares which have made a loss to add to the claim form. You also can’t re-purchase any of the shares within 2 months, or sell any other assets in the portfolio within 12 months.

However, executors can decide which shares to sell and which to pass intact to the beneficiaries. One possibility would be to sell the loss making shares and claim the relief. Profitable shares could then be given directly to the beneficiaries to sell as they wished.

Remember, capital gains are rebased on death, so the beneficiary would only pay capital gains tax if they later sold the shares, and the value had increased since the date they acquired them.

What Do You Need to Do?
HMRC do not issue refunds automatically, nor will they prompt you to make a claim.

You will need to submit a form to HMRC giving details of the estate and the transaction.

The forms are as follows:

You may wish to take legal or tax advice before completing the forms.

Some Other Ideas for Reducing IHT
If you plan ahead, there are a number of other options available for mitigating IHT:

While refunds can be a useful way of reducing an existing IHT liability, they are only available in a specific set of circumstances, and only if the assets inherited have effectively lost money. An efficient estate plan can help to ensure that more of your money goes to your loved ones, while keeping tax to a minimum.

Please do not hesitate to contact a member of the team to find out more about estate planning.

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