Market volatility means thousands of families may have overpaid Inheritance Tax

Thousands of families may be entitled to an Inheritance Tax (IHT) rebate due to stock market volatility. As the government does not automatically refund estates when this happens, many families could be unaware they’ve overpaid.

Overpaying IHT could occur if the value of assets falls between the benefactor passing away and the sale of them. Read on to find out why this affects an IHT bill and what you can do if you’ve overpaid.

When is Inheritance Tax due?

IHT is paid on the estate when someone passes away if the value exceeds certain thresholds.

Usually, there are two key thresholds to consider when calculating if an estate could be liable for IHT:

1. If the value of the estate is below the nil-rate band, no IHT is due. For 2023/24, the nil-rate band is £325,000 and the government has frozen it until 2027/28.
2. If the deceased is leaving their main home to direct descendants, such as children or grandchildren, they may also be able to use the residence nil-rate band. For 2023/24, this is £175,000. Again, the residence nil-rate band is frozen until 2027/28.

You can pass on unused allowances to your spouse or civil partner. So, if you’re planning together, you could leave up to £1 million before IHT is due.

Assets that exceed these thresholds could be subject to IHT. The standard IHT rate is 40%, so it can significantly reduce the amount beneficiaries receive.

The number of families reclaiming overpaid Inheritance Tax has increased by 22%

According to a report in the Telegraph, the number of families that have reclaimed overpaid IHT increased by 22% in 2022/23, when compared to a year earlier.

Overpaying can occur because an IHT bill is calculated based on the value of the assets on the date of death. However, the value of assets, such as investments, can change and beneficiaries may sell the assets for less than the original valuation. Yet, families may have already paid an IHT bill based on the original value.

Stock market volatility could mean more families overpaid IHT in the last few years. A family inheriting investments may find they sell the assets for less than the original valuation as the price can change significantly, even in a short period.

Similarly, as experts expect house prices to fall in the near future, more families could find they overpay IHT. According to the Halifax House Price Index, property prices fell by 2.6% in June 2023 when compared to a year earlier.

Economic challenges and rising interest rates mean some property experts expect the market to fall further. In March 2023, the Office for Budget Responsibility forecast that house prices would fall by 10% during 2023 and 2024. So, families that inherit property could find the value falls and that they’ve overpaid IHT as a result.

As properties are often among the largest assets inherited, the amount overpaid could be substantial. The Telegraph analysis suggests a family inheriting a home initially valued at £1.2 million that falls by 3.5% by the time it’s sold could have overpaid IHT by £16,800.

If the value of assets falls, the government will not automatically refund the estate – you must reclaim the amount overpaid. So, some families may be unaware they’re entitled to a refund.

How to reclaim overpaid Inheritance Tax

As IHT must be paid within six months of the date of death to avoid incurring interest, some families may pay the bill before they sell assets, or the probate process is complete. It could make it difficult to understand if the figures used to calculate IHT are accurate.

So, if you’ve sold inherited assets, it’s worth reviewing the value at the date of death and comparing it to how much you received when selling them. You can reclaim IHT if you sell:

• Property within four years of the date of death
• Qualifying investments within 12 months of the date of death.

If falling values have affected your inheritance, you can fill in a form to recover overpaid IHT.

There is a time limit on submitting a relief form. For property, you must submit the form within seven years of the date of death, and within five years for investments.

One important thing to note is that when you submit a relief form for investments, HMRC will consider all inherited investments – not just those that have fallen in value. So, if some investments have increased in value, the amount you can reclaim may be lower than you expect.

Contact us to learn more about Inheritance Tax

Whether you want to understand if you’ve overpaid IHT or what steps you could take to reduce a potential IHT bill on your estate, please contact us. We can offer advice that’s tailored to you to help you get the most out of your assets.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate Inheritance Tax planning.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes, which cannot be foreseen.

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