How to get an inheritance tax refund

Telegraph

07-05-2025

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Most of us are familiar with the idea of inheritance tax being calculated based on the value of a deceased person's assets at the date of death.
But what you might not be so clued up on, is the fact that if those assets have later fallen in value when they're sold – within certain time limits – it may be possible to claim an inheritance tax refund.
Here we take a closer look at how these rebates work, and how to go about claiming money that is rightfully yours.
Inheritance tax bills are rising
This much-maligned tax is due at 40pc on the portion of an estate worth more than £325,00, with the figure rising to £500,000 if the deceased leaves their main home to their children or grandchildren. Couples can share their allowances, meaning they have £1m in total to pass on.
More and more estates are being affected by inheritance tax as rising house prices and frozen thresholds push more families above the limit.
New figures released at the end of April by HMRC revealed that inheritance tax receipts brought in a record £8.2bn in the last tax year. This was an increase of £800m compared with the same period during the previous year.
Sarah Coles of the broker, Hargreaves Lansdown, said: 'With inheritance tax bills hitting a record high last tax year, more people need to consider how much their estate might be worth, and whether tax could be an issue.'
Laura Hayward, of professional services group S&W, added: 'Managing inheritance tax is a huge and growing concern for families.'
Why might you be due a refund?
With inheritance tax bills on the up, it's more important than ever to ensure you're not handing over more than you need to. And this is why it's worth brushing up on the rules on rebates.
Rebates can apply to properties, as well as shares and other assets.
Shaun Moore, tax and financial planning expert at Quilter, said: 'For instance, if a property drops in value – say the home was valued at £500,000 when the person died, but later sells for £450,000 – the estate may have overpaid inheritance tax on the original higher valuation.'
Properties are often over-valued, with families typically favouring quick sales over price. Shares can also go down in value, meaning they can also end up getting sold for a lower price than initially valued on death.
Mr Moore said: 'If quoted shares have fallen in value – for example due to recent stock market volatility following renewed concerns over global trade tensions and US tariff threats from Donald Trump – there could be an opportunity to reclaim some of the tax.'
Claiming back the difference in tax from HMRC is known as 'loss on sale relief', and can be worth thousands of pounds.
Mr Moore added: 'With markets often moving sharply during uncertain periods, the key is to check whether assets have lost value between death and sale.'
When is inheritance tax due?
Counter-intuitive as it may seem, families are required to pay inheritance tax before probate is granted. In other words, major assets such as property or shares cannot be sold until this has been obtained.
Charlene Young, pension and savings expert at AJ Bell, said: 'Inheritance tax is due within six months of death, so usually needs to be paid ahead of probate being granted, and ahead of the executors getting the authority to deal with the estate, including selling assets.'
As families can often experience long delays in the probate process, this tax often has to be paid long before assets are actually sold. This can leave assets exposed to market volatility for many months, and sometimes even more than a year.
Mr Moore said: 'This creates a real risk that by the time a property or shares are eventually sold, their value has dropped – opening the door to a potential refund.'
Right now, the Government is keen to point out that probate waiting time have finally eased.
Even so, complex cases will naturally take longer to process.
How can you find out if you're due an inheritance tax refund
If you're trying to work out if you're owed money, you need to compare the sale price of major assets such as property or quoted shares against the value submitted for inheritance tax purposes.
Mr Moore said: 'If the sale price is lower, there may be grounds to reclaim some of the tax.'
While shares are relatively simple to value for probate, property can be more difficult. As an executor, it's important to obtain accurate valuations.
'Don't get tempted to 'under-egg' a probate property valuation value just to try to avoid inheritance tax,' warned Ms Young.
'HMRC can challenge valuations for probate. And secondly, any capital gains tax on the sale could be higher than the inheritance tax would have been due if a more accurate valuation had been used for probate.'
As inheritance tax is a complex subject, it's worth giving some serious thought to seeking professional advice. A specialist can help you navigate the rules, and help you avoid making a potentially expensive mistake.
How to make a refund claim
If you think you may be due a refund, the onus is on you to do something about it.
Ms Young said: 'It will come as no surprise to learn that claims are not automatic. It is up to the executors or trustees to lodge a claim with HMRC.'
You must take care to submit the correct form. For property, the form is IHT38. For qualifying shares and investments sold at a loss, it is IHT35.
Don't delay, as there are strict rules and time restrictions. Ms Young said: 'The assets must have been sold (at a loss) by the executors within specific timeframes. For shares, it is 12 months following the date of death. For property, it is four years.'
When it comes to making a claim for a fall in property value, HMRC will expect clear evidence of the sale and an explanation for the drop – particularly if the difference is significant.
Be sure to provide supporting documents, such as sales contracts, valuations and evidence of when the property was sold.
Rebates can only be claimed on the first transfer
Note that claims cannot usually be made for any investments or properties already transferred to beneficiaries who go on to sell them at a loss.
Ms Hayward said: 'Refunds can only be claimed on the first transfer. They cannot be claimed if the asset leaves the estate without falling in value, then subsequently falls in value. Executors need to take this into account when considering what assets are being sold, and when.'
Be prepared for a long wait
Tax specialists warn that HMRC can take many months to process refund claims, particularly when dealing with large or complex estates, or where there are missing documents.
Mr Moore said: 'Families need to be prepared for a potentially lengthy wait before receiving any money back.'
You could be owed interest on inheritance tax overpayments
You might also be due interest from HMRC on the excess inheritance tax you are owed back with your refund, and especially if it takes a long time to process your eligible claim.
The interest rate you'll get is 3.5pc and is payable from the date you overpaid – until the date of the repayment from HMRC.
Ms Young said: 'Just be aware that this is a whole five percentage points less than the whopping 8.5pc interest charge levied on those who fail to pay inheritance tax on time – or who underpay what was due.'
Why the difference? HMRC's website says the disparity in the rates 'is in line with the policy of other tax authorities worldwide' and that it 'compares favourably' with commercial rates. In short, it does it because it can.