How to get your money back from inheritance taxes if the value of your home decreases

Make sure you haven't paid too much in inheritance taxes this year, as government receipts hit a record high

We describe how to submit a refund claim.

HMRC received an unprecedented 7.6 billion in inheritance tax receipts in the first 11 months of the 2024 - 2025 tax year, which was more than the 7.5 billion received in the full year of the previous year. The increase in property values over time and frozen inheritance tax (IHT) thresholds were the main causes of this.

If the value of your property or other assets has decreased by the time you sell, you may be eligible for an inheritance tax refund, which is not well known.

After the pandemic-induced housing market slump, the value of IHT refunds has increased recently, especially for real estate.

When is the deadline for paying inheritance tax?

If the value of your estate at death surpasses the government's tax-free thresholds, inheritance tax is due.

Everyone is currently in the nil-rate band, which has a tax-free limit of 325,000. HMRC may be able to collect 40% of the excess if your estate is worth more than this nil-rate band.

Families that leave their home to children or grandchildren are also given an additional allowance by the government, known as the residence nil-rate band, which is 175,000.

The total tax-free allowance that could be obtained by combining the residence nil-rate band and the nil-rate band is £500,000. You are exempt from paying taxes if you leave everything to your spouse or partner in a civil partnership.

If a home is bequeathed to children or grandchildren, the surviving spouse will have a combined tax-free and property limit of £1 million upon their death because they also have both allowances.

Both the residence nil-rate band and the nil-rate band will stay frozen until 2030, which has been the case since 2009. Additionally, pensions will be taken into account when calculating IHT as of April 2027.

NFU Mutual chartered financial planner Sean McCann stated, "These changes mean more people will be caught in the inheritance tax net."

Why you may be eligible for a refund of inheritance taxes.

It is not commonly known that individuals may not be eligible for an IHT refund for up to four years following their payment.

For the purposes of IHT, a person's estate is valued according to its value on the day of their death. In the event that IHT is due, payment must be made within six months.

However, you can get a tax refund if assets in the estate are later sold for less than their original value.

You are eligible for a refund of IHT if, within a year, you sell shares for less than their original value. In terms of real estate sales, the time frame is four years, and during that time, a lot can happen in the housing market.

Imagine that nearly two years ago, when a sharp decline in buyer demand due to a spike in mortgage rates caused house prices to reverse.

The Nationwide House Price Index shows that house prices have finally stabilized, with modest monthly increases and an average annual increase of 31.9 percent in February.

The rate of recovery in real estate prices has varied by region, though.

This implies that you might be eligible for a refund if the property was valued before 2023 and was sold during the recession or before prices had recovered within four years.

Do you qualify for a refund of inheritance taxes?

If specific requirements are satisfied, an estate may be eligible for an inheritance tax refund through the Loss on Sale of Land relief if the sale of an estate property results in a lower price than the declared value at the time of the owner's death.

A portion of the IHT that was initially paid using the higher probate valuation can be reimbursed thanks to this relief. You will not be eligible for a refund, though, if the relief is not applicable due to the sale not meeting specific requirements.

For instance, the executors of the estate are responsible for selling the property and reclaiming any taxes paid.

The loss must be greater than 1,000 or five percent of the death value, whichever is less. Additionally, a beneficiary or a member of their family cannot receive a refund if the sale was made to them.

Based on information gleaned from a Freedom of Information request by NFU Mutual financial advisers, there were over 7,000 reclaims for overpaid inheritance tax in 2023 - 2024, up 38% from the year ago.

Almost 5,000 of these families applied for refunds after selling their property for less than its initial death-related value.

"With 2023 witnessing a general slowdown in the housing market, it is not surprising to see such a significant increase in property reclaims during the last financial year (23/24)," Mr. McCann stated.

Although the market has stabilized since then, home prices in some areas are still far below their peak.

In what way is your inheritance tax refund calculated?

Here's an example of how to figure out your IHT reimbursement.

At the time of your death, your estate, which in this case is just a piece of property, is worth £500,000. You have never been married, have no kids, and have never given any gifts that will last a lifetime.

You give your property to a friend in your will. The estate's current IHT liability, which is 325,000 charged at 0%, can only be calculated using the Nil Rate Band.

Any estate value over this amount will be subject to a 40 percent inheritance tax, meaning the estate will be responsible for paying 70,000 in IHT (500,000 x 325,000 x 40 percent).

In the end, your property sells for £400,000, and within four years of your death, sales contracts are exchanged. This indicates that the estate has a 30,000 IHT liability, which calls for a 40,000 refund.

Additionally, Tom Newton, an associate in the wills and probate team at the law firm Nelsons, stated: "The property's sale value may be less than its initial value due to changes in its condition or damage since it was valued for probate purposes or the way it is sold, such as through an auction as opposed to the open market.

HMRC normally pays interest on the overpayment, which is computed from the date of the overpayment until the day HMRC issues the repayment.

How to submit a refund claim for inheritance taxes.

The sale of the property must occur within four years of the death, but an IHT refund claim may be filed up to seven years then.

It is your duty to proactively approach HMRC for a refund.

Refunds for inheritance tax are also available for investment losses, but only if you sell for less than the initial year following the death of a family member.

By completing the Gov.dot.uk IHT38 form, you can request an IHT refund.

For example, you will be asked if you sold it for less than the best price you could have gotten, the date of the sale, the gross sale proceeds, and the names of the buyers.

How long does it take to get a refund for inheritance taxes?

Refund processing and payment by HMRC can take anywhere from three to nine months from the time form IHT38 is submitted.

On the overpaid amount, HMRC usually pays interest, which is computed from the date of the overpayment until the date on which HMRC issues the repayment.