Qualifying for an Inheritance Tax refund following loss of sale on inherited property

Recent publicity on the low numbers of Executors who are claiming an Inheritance Tax (IHT) refund following the sale of a deceased’s residence needs investigating, especially if the property was located in a part of the UK (and Yorkshire) which has experienced a valuation reduction in the last 3 years.

Let’s consider when and how much of a claim could be made on the sale of a typical Yorkshire property, which formed part of a deceased’s estate.

A recent case included a family home in North Leeds which was valued at just over £310,000. The valuation was undertaken by a local Estate Agent in 2017 for “probate purposes” and this valuation was used in the initial IHT return submitted to HMRC. Along with the property valuation, other assets were included in the estate which led to an IHT liability (after all available exemptions and reliefs) of almost £100,000.

A word of warning, HMRC do recommend that Executors consider obtaining more than one probate valuation, especially if IHT will be payable, but all too often they are put off by additional valuation fees and time spent dealing with two separate advisors.

Over the course of the next two years the Executors marketed the property but with limited success in achieving a sale price equivalent to the £310,000 probate valuation, due to the property being dated and a number of potential purchasers being put off by the work required to bring it up to date. Additionally, an extension at the rear of the property was not built to a high standard and the appropriate planning permissions “appeared” to be missing. This fact alone restricted the number of potential purchasers who were buying with mortgage assistance as their funders were put off by the associated risks.

The Executors were convinced to put the property in an “online auction” and whilst this generated much more interest it was clear the selling price would fall well below the original £310,000 probate valuation. Almost two and half years after the owner died the property was sold at auction for just £260,000 – a loss on sale compared to the probate valuation of £50,000.

The Executors felt they had no choice but to sell at this lower price – due to pressure to distribute cash to the family beneficiaries who felt matters were dragging on unnecessarily. Fortunately, they agreed with the lower sale price received.

Some good news for both the Executors and beneficiaries was the IHT claim that we advised them to make under the Inheritance Tax Act 1984, section 191

By making the claim the Executors were able to substitute the probate valuation of £310,000 to the lower sale proceeds figure of £260,000, in turn this generated an IHT refund for the beneficiaries of £20,000 – a welcome cash bonus given the overall loss of £50,000 on the eventual sale of the property.

In making a claim of this kind there are some additional pointers to remember:

1.A 3 year “window” from date of death to actual sale date operates – the Executors got very close to selling outside this “window”.

2.Other property (including land) sales at a profit will need to be aggregated in any claim made.

3. Likewise additional sales “at a loss” will need aggregating too.

4.Profits or losses below £1,000 or 5% of the probate value are ignored completely.

5.The claim can be reduced, if for some reason the Executors purchased land or buildings in the “relevant period” – very unlikely but care needs to be taken.

As many more families experience the burden of IHT on a loved one’s estate the onus is on Executors to make IHT claims which reduce the overall liability – all too often now a claim under section 191 will need detailed consideration.

Nigel Shaw is a Private Client Partner at Garbutt + Elliott LLP and can be contacted on nshaw@garbutt-elliott.co.uk