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Inheritance tax can take a substantial amount out of a loved one’s legacy. What’s worse, sometimes the bill might be bigger than it actually needs to be – as an increasing number of families are discovering.
Over the last three years, there have been more than 18,000 claims for overpaid inheritance tax (IHT), according to a freedom of information request from NFU Mutual. And, as these claims could be just the tip of the iceberg, many more families could be in line for an IHT refund.
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IHT overpayments happen for different reasons. The most common is where an estate contains property, or stock-market linked investments like shares. These can change in value, but executors are under time pressure to calculate the IHT liability.
The executor is the person chosen to administer the estate of someone who has died – often a family member or friend, but sometimes a professional appointed to do this.
David Fenwick, technical probate lead and senior solicitor at Co-op Legal Services, which partners with Saga Legal, says the problems come down to time pressures. “Executors only have a short window – six months from the end of the month the person died – to pay IHT before interest starts accruing,” he explains. “To avoid this, they base their IHT calculations on provisional values.”
If any IHT is due, probate (the legal right to sell assets) is not granted until after the first IHT payment is made, which is why provisional values (estimated values used when the final value of assets isn’t yet known) are so common.
If the executors then sell these assets for less than the values that they declared on the paperwork, they can claim ‘loss on sale relief’ to get back the overpaid IHT. Loss on sale relief is a tax relief that allows executors to reclaim overpaid IHT if assets are sold for less than their declared value.
Take a property that had an estimated sale value of £450,000, but the executors were only able to sell it for £400,000. They would be able to claim loss on sale relief for this £50,000 difference. This could mean an IHT refund of up to £20,000 (depending on the size of the estate and any allowances).
In the case of shares, overpayments can occur if prices fall between the value on death and their sale.
Mistakes can happen too. Laura Mackin, partner in the Knights Private Client team, says overpayments can occur where something has been misvalued or overlooked. “A common mistake is overlooking an outstanding income tax bill,” she says. “If the deceased owes more income tax than first thought, the value of the estate would reduce because there’s a bigger liability.”
Or a new liability, such as an equity release loan, might have been discovered.
IHT allowances can also be overlooked. Rachael Griffin, tax and financial planning expert at Quilter, says that families aren’t always aware they can claim the transferable nil rate band and any unused residence nil rate band, for example.
“If the deceased had inherited their spouse or civil partner’s unused IHT allowances, this could potentially double their allowances from £500,000 to £1m. That’s a huge difference and it could mean an overpayment that runs into tens of thousands of pounds.”
Charitable donations made in a will can also reduce the IHT liability, which an executor might not have realised.
As NFU Mutual’s freedom of information request shows, overpayments are surprisingly common. In 2022/23, 31,500 estates paid IHT. That same tax year, HMRC received 3,040 claims for property relief, and 2,036 claims for shares relief – although some of these may relate to the previous year (and some of that year’s overpayments may have not have been claimed until the following year), as there can be a lag between an estate paying IHT and the executors filing a claim for overpayment.
Sean McCann, chartered financial planner at NFU Mutual says: “More people are realising they can make claims for overpaid IHT: claims on property increased by 65% between the 2022/23 and 2024/25 tax years.
“Property values can drop due to the market or property deterioration over time, while a volatile stock market could wipe money off shares and other investments.”
There is also a logical reason for overpaying IHT, says Fenwick. “I’d always advise families to adopt the worst-case scenario if they’re coming up to the six month point and don’t have a final valuation. If a property is worth £400,000 to £500,000, pay IHT on the higher amount. It’s better to pay too much and recover any overpayment with interest. Pay too little and interest will accrue on the underpayment.”
The financial incentive to overpay comes even more sharply into focus when you realise the interest rates that HMRC applies. While 3% is payable on any overpayments it refunds, you’ll pay interest at 8% on any underpayment.
Quite possibly. While the number of families making claims is growing, the experts believe many more estates will have paid too much IHT. Griffin says: “Refunds are not automatic. Given that you need to be proactive to check the rules and submit a claim, there’s a good chance that people don’t even know it’s possible, let alone how to do it. They could potentially be missing out on thousands of pounds.”
And, with pensions falling into the IHT net from April 2027, these numbers are only going to increase. The government estimates that an additional 10,500 estates will have an IHT liability in 2027/28 as a result of this change, with a further 38,500 paying more than under the current rules.
Claiming back overpaid IHT is easy, but there are rules you need to follow. To make a claim for loss on sale relief you need to be the executor of the estate (or the personal representative – the person legally responsible for administering the estate where there was no will), and use form IHT38 for property and form IHT35 for shares and other qualifying investments.
If you want to change the value of an item declared on your original form – including property and shares – or you made a mistake or overlooked a liability, you’ll need to complete form C4.
Time limits apply to loss on sale relief claims. For property, the executor must sell within four years of the date of death, and submit the claim before the seventh anniversary of the death.
With shares, the time limits are tighter. The sale must happen within one year of the date of death and the claim be submitted within four years.
Loss on sale relief is only available where the executor has sold the asset. It doesn’t apply if the item goes directly to the beneficiary and they make a loss.
There are no real drawbacks to claiming, but there is a potential catch – and a workaround for this.
Only assets sold by the executor are included in the ‘loss on sale’ calculation. Therefore, transferring assets (such as property or shares) that have gained value directly to beneficiaries (this is called ‘appropriation’) before any sale removes them from this calculation.
McCann explains: “If some have increased in value, this will reduce the amount of IHT that can be reclaimed. Where this happens, you could consider transferring the assets that have increased in value directly to the beneficiaries, rather than leave them for the executor to sell. This maximises the amount you can claim back.”
Fenwick from Co-op Legal Services also warns that it can take at least six months to process a claim for overpaid IHT – so don’t expect a quick response from HMRC. “It’s worth chasing a claim,” he adds. “This can speed up the process, but it will still take time to get any overpayment back.”
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