Tax relief gone wrong

Sunday, 01 February 2015
Amanda Edwards explains how a claim for loss on sale of land relief following a death can sometimes result in a larger tax bill.


Unfortunately, if a loss on sale of land claim is unfavourable, there is no mechanism for withdrawing it

A discount of between 10 and 15 per cent is usually allowed on the value of a deceased’s joint interest where the deceased was a co-owner of land together with anyone other than a spouse or civil partner. The rationale for this ‘joint-ownership discount’ is that land held jointly in such a way is more difficult to sell. However, if the land is sold, the discount does not apply post-sale. This has implications where the land is sold at a loss, as it may not be advantageous to submit a claim to HMRC for ‘loss on sale of land’, with a view to reducing inheritance tax (IHT).

Loss on sale of land following a death

A relief is available (where certain conditions are satisfied) when an interest in land is sold for a price that is different from its date-of-death value. The legislation is contained in sections 190–198 Inheritance Tax Act 1984 and a claim for the relief is made on form IHT38.

For example, Keith and Harry are brothers who jointly own a freehold interest in equal half shares in a rental property in the Midlands. On Keith’s death, the premises pass to Harry, and they are valued at GBP400,000 at the date of death, before any discount. The ‘entirety’ basis of valuation applies so that:

  • the entirety value is GBP400,000;
  • after applying the half fraction, the figure for Keith’s half share is GBP200,000; and
  • the 10 per cent discount allowed in this case by HMRC is applied to Keith’s half share, and its value for IHT purposes is reduced to GBP180,000.

Harry manages to sell the property some 24 months after Keith’s death. However, property values in the area have fallen in the meantime, and on the sale he obtains only GBP380,000. The solicitor initially considers a loss on sale of land claim for relief from IHT on the difference between the date-of-death value and the sale proceeds. However, on reviewing the figures, this seems disadvantageous. Keith’s actual half share of the gross proceeds is GBP190,000. If a claim for loss on sale is submitted, the discount previously given no longer applies and there will be IHT due on the additional GBP10,000 above the discounted value of GBP180,000.

Effectively, though the entirety is sold for less than the date-of-death value for the whole, the sale proceeds in respect of Keith’s half share (undiscounted) are more than the discounted value.

Interestingly, the HMRC Inheritance Tax Manual suggests an HMRC officer should send the taxpayer a form IHT38 to complete if:1

  • the taxpayer says they wish to claim the relief;
  • the taxpayer says that actual value is lower than the value originally returned or agreed, even if the relief is not specifically claimed; and
  • the valuation office mentions a possible claim for relief.

If the applicant is unrepresented and it is clear an interest in land is being sold for less than the value at death, the HMRC officer is requested to:

  • bring the relief to their attention;
  • send them a copy of form IHT38; and
  • warn them about the risks of making a claim that may not be in their favour, if this might apply.

The HMRC manual then goes on to outline circumstances where HMRC should not ask a taxpayer to complete a form IHT38.

In many circumstances where taxpayers are represented by an agent or advisor, the agent or advisor will themselves complete the IHT38 and submit a claim. Unfortunately, if a claim is disadvantageous, possibly because the share of the proceeds on a sale exceeds the discounted value previously returned, as in the example above, there is no mechanism for withdrawing it. In these cases, the taxpayer may have a claim in negligence against the advisor.

  • 1IHTM33022
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Amanda Edwards

Amanda Edwards TEP is a Solicitor with Boodle Hatfield.

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