IHT refunds and potential CGT savings on inherited assets

The tax regime doesn’t get any simpler, but there are options for refunds and savings in limited circumstances that may not be widely known.

This includes examples where assets in the estate of someone who has passed away are sold for either more or less money than the value they are given in the probate application, which should be their market value at the date of the death.

Capital gains tax (CGT) is usually due on a financial gain when an inherited asset is sold for a larger sum than its probate value, known as the baseline value for calculating any liability.

See also: Why valuation preparation is key under new IHT relief regime 

The tax would be due on the increase in value above that baseline, less the annual individual tax-free allowance (currently £3,000) and any costs associated with the sale of the asset.

However, it is possible to revise the probate value, says Phil Thompson, chartered tax adviser at North Yorkshire-based accountant Lintons.

In some cases, it will be better to do this if the inheritance tax (IHT) nil rate bands had not been fully utilised, rather than pay the CGT on the gain, says Phil, who has helped people though this process.

He cautions that it is not a simple decision to do this and that the less time that has elapsed between the date of death and the sale, the more straightforward the factors are likely to be, despite the legislation giving a specific three-year time frame for doing so.

“Valuations are a matter of opinion, and while professional help is usually used to value property and land, many of those valuations have not been fine tuned in the past because most farming assets were eligible for 100% relief from inheritance tax,” he points out.

The decision whether to revise a probate valuation for CGT reasons also depends on family circumstances and how assets in an estate are distributed.

Opposite applies with loss on sale

Where an inherited asset is sold for less than its probate value, a refund of IHT paid can be claimed.

The number of IHT refund claims more than doubled in the year to 5 April but, again, whether to make a refund claim depends on many factors.

“It may be that the individual affected by a loss of value compared with the probate value may have other gains elsewhere and may want to lock into the capital loss on the sale of the inherited asset to set off against those other gains,” says Phil.

“There is no hard and fast rule in applications to revise probate values – whether a lower or higher probate value than the original is accepted by HMRC will depend on a case-by-case basis and the more time that elapses, the trickier it can be [to adjust a probate value].

“For example, property or land may have deteriorated between the date of death and the date of sale.”

Also, in some cases, it can be more tax efficient for the beneficiary not to claim the relief, rather than it being claimed by the estate as a whole.

Relief on sales of stocks and shares

It is also possible to claim relief from IHT paid on the value of shares or investments that have then been sold by the executor at lower than probate value.

At NFU Mutual, chartered financial planner Sean McCann points out that in such cases, the claim must include all qualifying investments sold by the executor within 12 months of death, and not simply those that have fallen in value.

“If some have increased in value, this will reduce the amount of inheritance tax that can be reclaimed.

“In these circumstances, it may be more advantageous for the executors to pass the shares or investments that have increased in value directly to the beneficiaries rather than sell them.

“This means you make a claim only for those shares that have fallen in value, ensuring you maximise the benefit.”