23 August 2022
Recent increases in inheritance tax (IHT) receipts have been partly blamed on rising property prices and worsened by the fiscal drag of inflation and the impact on the frozen nil rate band (NRB) and residence nil rate band (RNRB), both of which are set to remain the same until April 2026. However, the current prediction of a downturn means executors and personal representatives should ensure that they don’t inadvertently overpay IHT.
Anecdotally, the tide is turning and rising interest rates, inflation and the cost-of-living crisis could all lead to fluctuations in the stock market, as well as having a negative impact on property prices. Recent data already suggests a current softening of the property market, and whilst the housing supply shortage appears to drive prices ever forward, it is difficult to predict the future impact of the current economic challenges on UK real estate values.
IHT is ordinarily paid on the value of estates in excess of the available NRB and RNRB at 40%. If an estate’s IHT liability has been paid based on higher values for qualifying assets that are subsequently sold at a lower price, executors and personal representatives should consider whether any IHT has been overpaid. IHT relief is available for assets forming part of a deceased’s estate which subsequently fall in value and are sold shortly after the date of death.
There are two IHT reliefs which could be valuable to estates in uncertain economic times:
Share loss relief
If qualifying investments (stocks, shares, unit trusts, etc) forming part of a deceased’s estate are sold within 12 months of death, at a value lower than the value at death and on which IHT was paid, a claim can be made for the IHT to be recalculated based on this reduced sale value.
A key point is that if a claim is made, the value of all the qualifying investments sold in the 12 months from death needs to be revisited, not just those sold at a lower value. So, it is important to carefully consider which investments are to be sold in this period and those that could be distributed directly to the beneficiaries. It is worth noting that crypto assets do not presently qualify for this relief.
Land loss relief
A similar relief exists for land and property comprised within a deceased estate subject to IHT which is subsequently sold for a lower value, within three or sometimes four years of death. The relief only applies if the consideration received differs by more than £1,000 or 5% of the IHT value on death, whichever is lower. Although, this relief is unlikely to assist with the majority of estates comprising UK real estate.
Up to 6,000 estates claimed these reliefs in 2019 to 2020, based on the latest available HMRC statistics. Claims can be made within four years from the end of the 12-month period following the death.
Despite references to tax cuts in recent prime ministerial hustings, IHT is not listed in the published policies, so it is unlikely that an IHT tax cut is on the immediate horizon. As such, rising IHT receipts might be here for a while. Executors and personal representatives of estates need to be alert to the prospect of making an IHT overpayment claim where these reliefs may apply.