Little-known tax mistake that thousands make every year

THOUSANDS of people have been able to claim tax back after making a little-known mistake.

Inheritance tax is paid on the value of someone’s estate after a person passes away.

People could get cashback after paying too much inheritance tax

People could get cashback after paying too much inheritance taxCredit: Getty

The estate includes things like property, money and possessions.

Any inheritance tax due is calculated on their value of the estate on the date of someone’s death and is paid within six months.

But if when a property or shares are sold later on the price is lower, they may have overpaid tax and can claim it back.

Thousands of people each year apply for a refund, according to figures obtained by NFU Mutual.

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Nearly 32,000 made a claim for a tax refund in the last six years, Freedom of Information requests by the finance firm.

Sean McCann, chartered financial planner at NFU Mutual, said: “A large inheritance tax bill can be a nasty shock for grieving families.

“These figures show that more and more people are waking up to the possibility that they could reclaim overpaid inheritance tax.

“Considering the buoyant housing market, it’s surprising to see more than 22,000 reclaims have been made on the sale of property or land.

“In some cases, this will have been a result of property being overvalued on the inheritance tax return or because of deterioration of the property between the death and subsequent sale.

“There have also been nearly 10,000 reclaims made following a fall in shares or investment values.

“During times of market volatility its important families check whether they have overpaid inheritance tax, in some circumstances reclaims can amount to thousands of pounds.”

Claiming inheritance tax back can be done on property if it’s sold within four years of the death, or on shares within 12 month.

All relevant investments sold need to be reported, not just those that have dropped in value.

Those that have increased in value will attract more tax so reduce the amount being claimed back.

Sean said: “In these circumstances, it may be more advantageous for the executors to pass the shares or investments that have increased in value direct to the beneficiaries rather than sell them.

“This means you make a claim only for those shares that have fallen in value, ensuring you maximise the benefit.”

The amount of inheritance tax you can claim back from HMRC depends on the amount of tax you paid and the change in value of the property or shares.

Funds from the estate are used to pay inheritance tax and this is done by the executor of the will – the person dealing with the estate after the person has died.

They can claim the tax back on behalf of the estate by contacting HMRC.

How much is inheritance tax?

There’s normally no Inheritance Tax to pay if the value of your estate is below the £325,000 threshold.

You can also avoid paying the tax if you leave everything above the threshold to your spouse, civil partner, a charity or a community amateur sports club.

If your estate’s value is below the £325,000 limit, you will still need to report it to HMRC.

If you give away your home to your children – including adopted, foster or step children – or grandchildren when you die, your Inheritance Tax threshold can increase to £500,000. This is called the “main residence” band.

If you’re married or in a civil partnership and your estate is worth less than the upper limit, any unused threshold can be added to your partner’s when you die.

This means their threshold can be as much as £1million.

The standard Inheritance Tax rate is 40% – but it is only charged on the part of your estate that’s above the threshold.

How to avoid inheritance tax

There are plenty of legal ways to reduce inheritance tax.

If you leave 10% or more of the net value of your estate to charity in your will, there is a reduced rate of 36% on some assets.

You can also give gifts while you’re alive, however these will be taxed if more than £325,000 is handed out in the seven years before your death.

There’s usually no inheritance tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents – known as ‘exempted gifts’.

There’s also no inheritance tax to pay on gifts between spouses or civil partners.

You can give them as much as you like during your lifetime, as long as they live in the UK permanently.

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Putting assets into a trust for your heirs as well as paying into a pension instead of a savings account, will also help reduce inheritance tax.

There are other reliefs too, such as business relief and agricultural relief where some assets can be passed on tax free.

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