The ability to reclaim inheritance tax, in the right circumstances, has been around for a long time. However, inheritance tax reclaims hit a six year peak in 2020 and so, as this article tantalisingly asks, "could you get money back?"
There are two main triggers for reclaiming overpaid inheritance tax; the first is on the sale of a property if the property in question is sold for less than it was worth at the date of death. The second is on a sale of shares, if they are sold for less than they were worth at the date of death. In relation to property the sale must have occurred within four years of the date of death. The time limit is shorter for share sales and so executors can only reclaim inheritance tax on sales of qualifying investments if they are sold within twelve months of the death.
The data shows that the total number of repayment claims being made more than doubled between 2015 and 2020. Some of these reclaims may represent executors who have simply paid too much tax, for example by not applying the correct tax reliefs when calculating the inheritance tax due. However, the vast majority are likely to be as a result of the fall in value of property prices or the fall in the value of the stock market between the date of death and the date of sale. So, whilst the headline suggests a windfall for the taxpayer, in most cases that "windfall" will in fact be offset by the drop in value of estate assets. In the case of properties, which tend to make up the largest part of an estate, this may mean that the taxpayer is locking in a large fall in the overall value of the estate when they agree a sale of a property.
Awareness of the timeframes involved is important. For example, if a £1m share portfolio has fallen in value by 50% over the course of the year since death then selling the underperforming portfolio within one year of death will generate an inheritance tax reclaim of up to £200,000. However, sell the portfolio one year and one day after the date of death and the tax reclaim will disappear.
Careful planning may also be needed. For example, gains offset losses, so executors may want to consider passing shares to beneficiaries that are performing well and selling the underperforming holdings to lock in the tax reclaim.
Finally, consider the use of deeds of Variation as a mechanism to reclaim inheritance tax. If a beneficiary is intending to use part of their inheritance to make gifts to charity then if the beneficiary enters into a deed of variation within two years – effectively re-writing the Will to pass part of the estate to charity – this will trigger an inheritance tax reclaim for the estate.
Inheritance tax reclaims jump to six-year high: could you get money back? The number of families reclaiming overpaid inheritance tax increased to a six-year peak in 2020, new data has revealed