The property market is often volatile but throw a Coronavirus pandemic and a stamp duty holiday into the mix and it is easy to see how property prices can vary dramatically, even in a relatively short period.
Where a deceased’s estate includes land, inheritance tax is computed by reference to the probate value. However, this may be substantially different to the amount that is realised by the executors when the land is finally sold. If the sale proceeds are less than the probate value, the estate may have paid inheritance tax on a value that was never realised.
However, the tax legislation provides for a specific inheritance tax relief where there is a loss on the sale of the land.
The relief applies where the appropriate person – usually the executor – sells an interest in land included in the deceased estate within four years of death for a value different to its value at the date of death. Where this is the case, the executor can make a claim for the sale value to be substituted for the value on death.
Harold died in September 2019. His estate included his home which was valued for probate purposes at £800,000. It was subsequently sold for £750,000 in June 2020.
His executor claimed to have the sale price substituted for the probate value, reducing the inheritance tax payable on his estate.
The sting in the tail
A problem can arise if the deceased’s estate includes more than one property. Where relief is claimed, the sale price must be substituted for the probate value for all properties sold within the four-year period. The executors cannot choose the value which gives the best result – the same approach must be applied consistently.
Bill died leaving his family home and three investment properties. The investment properties were valued for probate purposes at, respectively, £200,000, £300,000 and £500,000. All three properties were sold within four years of Bill’s death realising, respectively, £250,000, £290,000 and £540,000.
Despite the fact that the second property sold for less than its probate value, it is not worthwhile making a claim to substitute the sale price for the probate value as this would also apply to properties 1 and 3, increasing the value of the three properties for inheritance tax purposes from £1 million to £1,040,000 – an increase of £40,000.