Claiming an IHT Refund if Your Property Price Has Dropped

If you have recently inherited property to rent in London, a little-known tax break could save more than a thousand pounds in Inheritance Tax. 

Official property price data from the Land Registry in 2019 show house values in the capital plunged by 4.4% in the year to the end of May 2019. 

That took the average London house price down from £478,485 a year ago to £457,451 now - and they are expected to fall farther. 

Inheritance Tax paid 40% on the higher valuation would be £191,394. Still, on the lower valuation, the new owner would save £1,214 - and as a bonus, HM Revenue & Customs must pay interest on the money repaid as well. 

The saving comes from a tax rule that is not widely publicised that allows an estate to reclaim Inheritance Tax on land and property - including a home - if the asset is sold at a loss within four years of the date of death of the former owner. 

Selling at a loss means when the selling price is lower than the valuation put on the home when estimating how much the estate was worth at probate. 

The rules say Inheritance Tax should generally be paid within 12 months of someone’s death, but a property may be sold sometime later - and if house prices have fallen, too much tax has been paid. 

As a rule of thumb, the sale price must be 1% or £5,000 lower than the property value on which Inheritance Tax was calculated to qualify for a refund. 

Land Registry figures put London's average home prices at 95% of May 2018 values and slip comfortably into the Inheritance Tax refund criteria. 

Claims should be made on HMRC’s form IHT38

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Tax is an aspect of residential property investment which is often overlooked. There are many twists and turns to consider at all levels, whether for income tax, capital gains tax or inheritance tax. It is vital to get the ownership structure right and ensure that all tax relief, allowances, and claims are made.