Falling house prices could enable families to reclaim IHT

Families in the UK could have an opportunity to reclaim thousands of pounds in inheritance tax (IHT) from falling property prices brought about by the end of the stamp duty holiday.

House prices fell by an average of 3.7% in the UK in July compared to June, and they were down 4.5% in England, according to the government’s UK House Price Index.

The stamp duty free threshold will return to £125,000 from Friday 1 October.

IHT is based on the value of property at death, and if the property is sold by the executors within four years of death at a lower value, overpaid IHT can be reclaimed. However, the tax rebate is not automatic and has to be pro-actively reclaimed.

A Freedom of Information (FOI) request submitted by financial advisers at NFU Mutual revealed that 3,630 families reclaimed IHT this way in 2020/21, but falling property prices could lead to more.

“With house prices starting to dip, it’s important families are aware of this ability to reclaim inheritance tax that could save them thousands of pounds,” said NFU Mutual chartered financial planner, Sean McCann.

“IHT is assessed on the value of a person’s estate on the date of death and the tax must normally be paid within six months. But if property is sold within four years of death for a lower price, the overpaid inheritance tax can be reclaimed.

“The number of these reclaims dipped last year due to the buoyant housing market, but are likely to increase if house prices continue to fall.  

“With IHT allowances frozen for the next five years, more and more families are being caught in the net. It’s important to take advice to ensure your family doesn’t pay more tax than they need to.”

Families can also reclaim overpaid inheritance tax on the value of qualifying shares and investments sold by the executors at a lower value in the 12 months after death.  Another FOI request by NFU Mutual revealed the number of people reclaiming IHT on loss of shares increased last tax year to 2,240. 

“These figures show more people are becoming aware that they can reclaim overpaid inheritance tax when share prices fall,” McCann added.

“The increase in claims is due to the fall in share values we saw as a result of the coronavirus pandemic in the early part of 2020. Many families are unaware they can reclaim overpaid IHT when share values fall.”

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