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Nigel Shaw, Trusts & Estates Planning Director nshaw@garbutt-elliott.co.uk

Know tax guidelines or you could inherit real problems

There was a recent interesting exchange in Parliament regarding the ongoing problems that Executors and others have in paying Inheritance Tax principally on properties that are currently unsaleable. Not only does this present cash-flow difficulties in funding Inheritance Tax payments whilst it is unsold it also creates problems in winding up a Deceased person’s estate. There is pressure on Executors to continue funding annual instalments of Inheritance Tax often on a property which has been valued for probate purposes way in excess of its current valuation.  Only when a property is sold within four years at a figure lower than its Probate valuation will the clauses in the Inheritance Tax legislation apply.   A closer look at these provisions will serve as a useful reminder to all Executors as to the hoops they have to go through to claim this important relief:-

Valuation issues

Care needs to be taken because where the sale is actually made within three years of death HMRC do have substitution powers to both increase or decrease the value at death.  However, only where the sale is made in the fourth year will such substitution be made which produces a decrease in the value of the property on death.

Sale value

When considering whether the property is actually sold for a figure lower than the Probate value it is always the “gross selling price” that is taken into account and no deduction is allowed for any expenses of sale.

Furthermore, the sale value will not be substituted for the value on death if the difference is less than £1,000 or 5% of the original valuation.    Clearly, in the last 18 months or so the valuation declines have been significantly more than 5% so this restriction to the relief is unlikely to affect Executors at the moment.  

Another restriction concerns who the property is sold to.  If this is to a beneficiary under the Will or the spouse, civil partner or child or other dependent of a beneficiary then relief will not be available.     This is on the basis that the parties are all “related” and could arrange a sale at less than full market value.  Therefore, if the relief is to be applied it is essential that the sale is with a third party and that you do not fall foul of the restrictions on sales to beneficiaries and their families. 

There is a whole host of legislation covering adjustments to sale value, and regrettably space does not permit a full resume of these clauses.   However, it is always important to ensure that when comparing the eventual sale proceeds of the property with its Probate value that the land was in same state throughout the period between date of death and date of sale, otherwise restrictions will be applied as you are not comparing “like with like”.   

Many Executors that we are dealing with at the moment are worried that they may not be able to effect a sale within the permitted four year period and it is important to emphasis that when looking at this period it generally applies from the date of death to the date of contract.  

Finally, as with most matters relating to tax it is important for the right person to make the right elections at the right time.  When it comes to claims for relief from Inheritance Tax under these sections the person who is liable to pay the tax attributable to the value of the interest sold must make the sale and claim.  This will usually be the Executors where they are liable for the Inheritance Tax but can often be a beneficiary where a property has been left to him subject them paying any underlying Inheritance Tax.  Once again, care needs to be taken to ensure that you do not fall foul of making an invalid claim.

In summary then if a relative or friend has died in the last 2 years or so there is likely to be a more than 5% reduction in the current valuation of any property which they held all things being equal.  If the estate was liable to Inheritance Tax which currently would value the estate in excess of £312K then a claim under these provisions once the property has been sold should give rise to a repayment on any instalment which has been paid to date and at the same time reduce the overall level of Inheritance Tax payable on the estate generally.   With economists predicting further falls in residential property it will be important to make sure that when calculating Inheritance Tax liabilities that full account is taken of the current provisions offered in these circumstances by HMRC.