IHT relief for when property prices slump

Selling a house as an executor of someone's estate in a falling market can lead you straight into a trap in the form over an over-the-top Inheritance Tax bill. What can you do to set the record straight and reduce the tax payable?

Property sold after death

Scenario. The owner of some valuable farmland died but before it could be sold by their executors, its value fell substantially. At the time of the death it was worth £500,000, and Inheritance Tax (IHT) became payable on that figure. A little under three years later, a contract for the sale of the farmland was entered into and the sale price was set at £350,000 which was the market value at the time. The executors sought to have the estate's IHT bill re-calculated by substituting this lower figure for the original £500,000. Did they succeed?

General IHT rule. If, within four years of death the property is sold for less than its IHT probate value, then the earlier IHT liability can be reduced by substituting the lower sale proceeds, therefore hopefully saving the estate IHT.

In this case. The purchaser failed to complete, and by the time a new purchaser was found, the period during which they could have substituted a lower value had expired. Accordingly, the IHT charge had to be based on the higher probate value with no reduction to reflect the lower sale amount.

The problem. You can never be certain of a property deal until it has completed. If you are hoping to get a reduction in the IHT bill to reflect a falling market, and the search for a buyer (who will complete) is dragging on, you could end up out of time to make the necessary election.

The solution

With hindsight, it's clear what the executors could have done. As they were getting close to the end of the three-year period, they should have prepared a contingency plan. Near the time limit, in the absence of completion of the sale by the intended purchaser, perhaps the land could have been sold to an "in-house" buyer - such as a company set up for the purpose? Then the sale would have allowed them to substitute a lower value into the deceased's estate, and the IHT bill would have been reduced.

Warning. If this emergency solution has to be implemented, it would not be without cost. Stamp Duty Land Tax, for example, would normally be payable. The additional costs would have to be weighed against the potential IHT savings before deciding whether to implement this strategy.

Anti-avoidance? Could this plan of action (a sale to an in-house buyer) possibly be open to attack under anti-avoidance rules? Unlikely. After all, an eventual sale to an unconnected third party may not take place for several years (if ever). In any event, it could hardly be argued that there was a pre-ordained series of transactions as part of a tax avoidance scheme.

Conclusion

In the hurly-burly of conducting property deals, there are normally 101 things to think about. But if you are an executor, and property prices are falling, you should make that 102.

Tip. As an executor, if you are hoping to get a reduction in the IHT bill to reflect the falling market, and the search for a buyer is dragging on, you must consider whether to put a safety net in place, taking into account the potential costs. Hopefully, you won't need it because you'll have a four year time-frame, but why not be prepared?

If you need any more information or advice about inheritance tax or any other tax issues, please don't hesitate to get in touch on 0191 386 4786

IHT relief for when property prices slump

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