Increasing number of wealthy families make claims for inheritance tax repayments
An increasing number of wealthy families in the UK are making more claims for inheritance tax repayments under a little-known rule that allows refunds on share and property losses.
Under the rule, executors are allowed to apply for IHT refunds on losses made ont he sale of inherited securities, including listed shared, gilts and unit trusts, within 12 months of an individual’s death and for up to four years for the property.
According to an HMRC reply to a Freedom of Information Act request (FOI), in the 2019-20 tax year, there were a total of 6,775 such IHT reclaims, an increase from 5,949 in the previous tax year.
The Financial Times reported that these payments were among a total of 9,864 IHT repayments made by HMRC in 2019-20, including the refund of overpayments made on account during the administration of an estate. The total number was down from 12,365 in 2018-19.
Jill Walker, private client director at Anderson Anderson & Brown (AAB), told Scottish Financial News: that the current IHT rules are ‘complex’ and it is important that executors are confident in the application of these rules when calculating the tax due on an estate.
She said: “HMRC recently published data which showed that there were over 5,000 investigations into IHT accounts, raising an additional £274m of tax. HMRC now investigates approximately one in four taxable estates.
“It is encouraging to see the number of loss relief claims increasing, which suggests that awareness of available IHT reliefs is growing. I would expect the number of refunds to continue to rise given the impact of COVID-19 on the economy and stock market. However, it is important that tax does not drive investment decisions and financial advice should always be sought.”
Ms Walker added that there have been a number of reports published recently advocating some significant changes to the IHT regime but the tax profession are keen to consult with the Government on these rather than sweeping changes being introduced at short notice.
She concluded: “This allows taxpayers the opportunity to plan their tax affairs but it is important to take action to utilise reliefs as they are now if that is beneficial.”
However, tax experts have warned that selling assets to reclaim IHT losses was not always the right course of action. They said people should take financial advice to understand their individual position.
IHT is charged on the value of an individual’s assets upon their death. Normally, it must be paid within six months of the death, before the estate can formally be handed over to their heirs.
The tax is levied at 40% for estates over the tax-free threshold of £325,000. Married couples and those in civil partnerships can combine their allowances.
In order to claim IHT reliefs, executors complete either an IHT35 form on share losses or an IHT38 form on property losses. For share losses, the tax office considers the whole share portfolio, not just individual shares trading at a loss. If some shares or unit trusts have increased, all the sales are aggregated.
HMRC said: “Many assets fluctuate in value over time. the IHT calculation is initially made on the value at death rather than on sale proceeds, when the price of an asset may have increased or decreased.”