Families risk overpaying thousands in inheritance tax because of falling house prices

Two people with money_tax #3 (1).jpg
Two people with money_tax #3 (1).jpg

Families face overpaying thousands in inheritance taxes because of falling property prices, financial advisers have warned.

The number of families overpaying the divisive 40pc duty is expected to “rocket” this year, as HM Revenue & Customs calculates tax due by using the property value at the date of death, not when it is sold.

It means bereaved families selling homes months after the loss of a loved one risk paying over the odds, as buyers make offers below estate agent valuations and house prices fall.

House prices recorded their first annual drop since 2012 in April, dropping by 1pc year-on-year, the lender Halifax said last week. Economists now predict further house price drops, because of stubborn inflation which is expected to keep interest rates high and raise the cost of borrowing.

A couple leaving a £1.2m house to their children would normally trigger an inheritance tax bill of £80,000. However, if the value of the home dropped by 4.4pc – as economists have forecast this year – then the family could reclaim more than £20,000 in overpaid death duties.

Families can claim back the overpayments, but there is a four-year reclaim window after which claims are rejected.

Since the 2016-17 tax year, more than 24,000 families have reclaimed overpaid death duties in this way, according to data obtained under a freedom of information request.

Claims are now expected to surge, as the property market enters a downturn and probate registry delays result in house sales taking longer.

Sean McCann of advisers NFU Mutual said: “These reclaim figures will rocket this year if house prices continue to decrease.”

It comes as this newspaper campaigns for inheritance tax to be scrapped, along with more than 50 MPs piling pressure on Rishi Sunak to lessen the tax burden on voters ahead of a general election.

Former chancellor George Osborne said on Friday the tax-free threshold for the death duty should be increased with inflation. Mr Osborne introduced an extra £175,000 tax break for families passing on their homes to children and grandchildren during his time in Number 11, known as the “main residence nil-rate band”.

However, the main £325,000 inheritance tax allowance has not risen since 2009, despite years of house price growth and inflation.

It means thousands more will be forced to pay inheritance tax in the coming years due to the “fiscal drag” of the frozen threshold, forecasts from the Office for Budget Responsibility show. Receipts from the duty are already at record highs of £7.1bn.

A Government spokesman said: “More than 93pc of estates aren’t expected to pay any inheritance tax in the coming years – however the tax still raises more than £7 billion a year to help fund public services like the NHS and schools.

“Where a property has dropped in value prior to sale, beneficiaries are protected by ‘Loss on Sale Relief’ which ensures they do not overpay inheritance tax.”

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