Housing market fortunes
Could you end up paying too much tax?
Falling property values could result in inheritance tax (IHT) relief for families selling the homes of deceased relatives. However, delays in finding buyers in this current economic climate may mean that some homes are being sold for significantly less than their ‘probate’ valuation, the amount calculated at the time of death and registered with the tax authorities.
As the value of an individual’s estate is usually dominated by their home, the significant rise in property prices over the past decade has taken many over the £325,000 (2009/10) IHT threshold at which surviving children or other relatives, except a spouse, pay 40 per cent tax.
IHT is based on the valuation at the time of death, so it makes sense to have a full survey of the property. Otherwise, if the figure is passed to HM Revenue & Customs (HMRC) based only on an estate agent’s marketing valuation, without a survey, it may be rather bullish and you could end up paying too much tax.
As a result of the credit crunch, falls in property prices have been far-reaching, and the sellers of probate properties could potentially claw back a significant amount if the estate has vastly reduced.
When UK house prices were rising, it was common for the sale price of a property to exceed the probate valuation, in which case capital gains tax was payable on the difference. The reversal in housing market fortunes has thrust the tax relief into the spotlight, and application for the process must follow a set, clear path.
First, when an estate worth over £325,000 is left to children, say, or if no will exists, the executor must as usual arrange for the estate to be valued and the recommended figure be reported to HMRC.
An appeal against the value of the estate because of an inflated property value has to be made within four years of the date of death. You’ll need evidence, first, that the eventual sale was made on the open market for a realistic figure.
Fluctuating asset values also mean that now is a good time to review your will, or write one if you don’t have one. Typically, people leave gifts on two bases: their monetary value and their sentimental value. Usually, this is based mostly on the approximate calculation of physical items such as property, equity portfolios or cash in the bank.
However, the credit crunch, economic downturn and recession mean that these calculations can now be significantly awry and the benefactors may, albeit inadvertently, leave vastly different values to the beneficiaries.
If a death has already occurred, you could use the HMRC loss relief rules that already exist to ensure that you don’t pay inheritance tax based on the price of an asset that has fallen dramatically between death and sale.