With recent reports of house prices rising by 3.9% in Yorkshire and the Humber over the last year, the fastest rise in the UK, little thought has probably been given to what should happen if the value of a deceased person’s property drops after the date of death.
In light of the recent Coronavirus difficulties, we have had a number of clients enquire as to the inheritance tax (“IHT”) consequences if there is a sudden drop in the value of the property after the date of death. In particular, if a sale happens and the sale price is less than the date of death value, can they claim any IHT relief or refund?
How is Inheritance Tax originally paid?
First, it is important to remind ourselves how HM Revenue and Customs (“HMRC”) initially calculate the IHT due on a person’s estate. HMRC will calculate the IHT due by looking at the value of the deceased’s assets at the date of death. Where IHT is payable on an estate, you will be required to obtain a formal written valuation of the deceased’s property and this must declare the value as of the exact date of death.
When paying the IHT on a person’s death, HMRC are initially not too concerned if the value of the property goes up or down after the date of death. There are merely concerned with the value as of the date of death as that is what is subject to IHT.
If the value of the property increases between date of death and date of sale, capital gains tax could be payable to HMRC on the “gain”. There are various ways we can help to try and mitigate this.
If the value of the property decreases between date of death and date of sale, there is the opportunity to reclaim some of the IHT that was paid on the date of death value. It should be noted however, that if the estate has not paid any IHT to begin with, no relief or IHT reclaim is available.
Loss on sale of land relief
The rules (s190-s198 Inheritance Tax Act 1984)
In basic terms, relief in the form of an IHT refund may be claimed where:
- An “appropriate person”;
- Sells an “interest in land” included in the deceased’s estate;
- The sale must be within 4 years of death;
- For a value different to its date of death value; and
- The claim must be made within 7 years of death.
Who is an “appropriate person”?
An appropriate person is either:
- the person liable for the IHT attributable to the value of the interest in land in question, or
- where there is more than one such person liable, the one who is actually paying the tax.
In most cases, the “appropriate person” is the deceased’s executors or administrators (collectively known as the personal representatives). However, an appropriate person may also be a specific legatee who is bearing the burden of IHT.
The rules are clear however, that where a personal representative accounts for the IHT and then transfers the land to a beneficiary to then sell it at a loss, relief will be denied. This is because the beneficiary is not the “appropriate person” for rule 1 (above) and the personal representative cannot claim because they are not the person to have sold the land (failing to satisfy rule 2, above). Please therefore be careful in transferring property to beneficiaries prior to assessing the merits of this type of claim.
What is an “interest in land”?
An “interest in land” is widely defined. However, it must be noted that the interest in land must actually be comprised in the deceased’s estate if it is to qualify for relief. Therefore, holding an interest in a partnership, for instance, which holds land but where the partner holds no rights over specific partnership assets, does not amount to an interest in land within the deceased’s estate.
Examples where the relief is unavailable
Not all circumstances satisfy the rules listed above. The following situations are typical examples of where the relief would not be allowed:
- the difference between the date of death value and the sale price is less than £1,000 or 5% of the value on death, whichever is lower; or
- where the sale is not for the best price which could have been achieved. Perhaps it was sold to a beneficiary, or a relative of a beneficiary, at an undervalue.
Other key points to note
- If the deceased owned more than one property, all of their properties sold within the 4 years after death will have their sale prices substituted for their date of death prices. You cannot cherry pick one property which has reduced in value, if the deceased’s other properties have increased in value. In that scenario, you could end up paying more IHT if you are not careful! Do not therefore make a claim until all properties have been sold in that 4 year period. You cannot withdraw a claim if it later become clear it is going to cost you more in IHT.
- The date of “sale” is taken to be the date contracts are exchanged.
- If there is a legitimate reason why the property has reduced in value (perhaps due to structural damage or a lease has been granted, etc) the claim may be disallowed.
If you have any queries about any issues raised in this blog, please do not hesitate to contact our Private Client team.
Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.