Families could cut their inheritance tax bills by thousands of pounds by using a little-known rule that allows them to adjust the valuation of the estate of a deceased relative if house prices have fallen.
The recent decline in property values, especially in London, makes the tax concession particularly valuable now. House prices in the capital fell by 4.4% in the year to May, the biggest drop in a decade, according to data published last week by the Office for National Statistics. This follows a general slowdown in house price growth over the past three years, driven mainly by market slumps in the south and east of England. As a result of these falls, many families risk paying too much inheritance. When someone dies, any land and buildings they own are part of their estate when it comes to working out IHT. Most estates don't have to pay because they are valued at less than the threshold: £325,000 in 2012-13. Above this, tax is paid at 40%.
If HMRC believes the executors have been "negligent" in the way they have done the valuation, the estate could end up being landed with a fine of up to 100% of the extra liability. The good news is if you sell a building or land within an estate for less than the value that you paid IHT on, you may be able to claim relief, provided it was sold within four years of the death. Use form IHT38 to do so. Many people don't realise they can claim back IHT if the property sells for less than it was valued at during probate. With house prices generally falling, thousands of people could still be able to claim back any overpayment.
About the Author: Glen Callow
