With property prices uncertain in the wake of the coronavirus pandemic, larger numbers of families may be looking to make use of loss relief when selling property in a deceased’s estate.
At its simplest, inheritance tax is charged at a standard rate of 40 per cent on any part of an estate above £325,000. However, there are various exemptions and reliefs which can impact the tax position, for example leaving an estate to a spouse or charity, and the lesser-known option of securing loss relief.
Inheritance tax is charged on the value of your assets at the date of your death. In a falling market, this can present significant issues; the estate will have paid 40 per cent tax on an asset which might subsequently be worth much less. Fortunately, in certain circumstances, it is possible to reclaim some of the tax paid. In short, on the sale of a property, the sale price can be substituted for the date of death value, meaning that the tax paid should better reflect the reality of the lower property price, and a tax rebate secured.
As with many tax reliefs, there are various strict rules that must be complied with. For example, the property must be sold within 4 years of the date of death, and must not be sold to, amongst others, a beneficiary or their spouse. Added to this, the relief will not apply if the fall in value is less than £1,000, or 5 per cent of the property’s date-of-death value, whichever is lower.
Crucially, you have to claim the relief; it will not apply automatically. The result being that unless you are aware of it, you won’t benefit from it.
Most importantly, the sale (and claim) has to be made by the “appropriate person”. This is the person that was originally liable to pay the inheritance tax. That means that if the property has been passed out of the estate to the eventual beneficiary and is then sold, perhaps unfairly, the relief is lost.
The claim should be in writing and signed by the person making the claim. It must specify: capacity in which the person is making the claim; details of the ‘interest in land’ sold; the date of sale; the parties to the sale; and the price obtained.
HMRC’s Form IHT38 has been designed for this purpose, and covers all of the above.
A lot of care is needed when applying for the relief where there is more than one property. The reason for this is that when a claim is made, it is done on an “all or nothing” approach, which means that the sale price of all interests in land sold within the four year period are revalued (which would include properties sold for a higher value). The exception to this is property sold for profit in the fourth year. The general rule is not to apply for the relief until all properties have been sold. Even then, care needs to be taken to ensure the claim will result in a rebate, as opposed to triggering more tax – a claim cannot be withdrawn once it has been made!
As long as the implications are carefully thought through, loss relief on a sale of property could be an attractive and useful tool for families at the current time.
Alice Edwards is associate in the Private Client team at Winckworth Sherwood
