Property slump offers unexpected IHT relief

Published 03rd Mar 2009

The downturn has an upside when disposing of an estate

A falling property market could result in inheritance tax (IHT) relief for thousands of families selling the homes of deceased relatives.

Delays in finding buyers stretching months or years has seen many homes sold for significantly less than the "probate" valuation, calculated at the time of death and registered with the tax authorities.

As the value of an individual's estate is usually dominated by their home, the bubble that saw prices treble between 1997 and 2007 has lifted many over the £312,000 IHT threshold at which surviving children or other relatives (except a spouse) pay 40% tax.

Now, with price falls of 10.2% on average in 2008 according to the Communities and Local Government department, sellers of probate properties can claw back thousands of pounds if the estate is vastly reduced.

For example, a probate property valued at £275,000, added to an individual's £50,000 estate, would total £325,000 - and an IHT bill of £5,200 for surviving children. However, if the probate property was later valued at £250,000, it would mean an estate of £300,000 and exemption from IHT.

"Not everyone knows about it and it's possible that many people are paying too much inheritance tax," says Simon Aldous, a chartered surveyor specialising in probate sales for estate agency Savills. "As IHT is based on valuation at time of death it's best to have a full survey of the property. If a figure is passed to the taxman, based only on an estate agent's marketing valuation, without a survey, it may be rather bullish and you could end up paying too much tax."

When UK house prices were soaring, it was common for the sale price of a property to exceed the probate valuation, in which case capital gains tax was payable on the difference.

The reversal in housing market fortunes has thrust the tax relief into the spotlight, and application for the process must follow a set, clear path.

First, when an estate worth over £312,000 is left to children, say, or if no will exists, the executor (usually the deceased owner's son or daughter) must as usual arrange for the estate to be valued and the recommended figure be reported to Revenue & Customs.

For any appeal against the value of the estate because of an inflated property value, says a spokeswoman for R&C, your action "has to be done within four years of the date of death".

You'll need evidence, first, that the eventual sale was made on the open market for a realistic figure. .

With this, applicants then have to complete form IHT38, which can be downloaded from www.hmrc.gov.uk, filled in and sent off.

In 2007 probate sales accounted for 7% of UK house transactions. But as the downturn has deepened and purchases have more than halved - with a steady death rate - they now represent 15% of homes on the market.

Solicitor Nick Bird, whose mother died last November, decided to sell her house in Esher, Surrey, soon afterwards despite the market downturn.

The probate valuation was more than £900,000 but Bird and his two sisters - who were joint executors - set an asking price below that to attract buyers. It worked and they got five offers, but all below the probate valuation.

"We arranged with Revenue & Customs that, because we attracted lots of bidders, the sale price on the offer we accepted - below £900,000 - was a clear and transparent figure reflecting the fact prices had fallen. Therefore the IHT is to be based on the sale price not the original probate valuation," he says.

• To apply for probate of an estate visit www.hmcourts-service.gov.uk or call 0845 302 0900

Source: ' The Observer '

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