Property and Tax Issues

Isis' Maggie Fleming answers readers questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.

The questions and answers are reproduced for you here.

This page contains Questions & Answers from June 2008. Older articles are accessed through our Archives page.

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I am an executor engaged in winding up an estate, whose owner died eight months ago. The principal asset is a house, valued for probate at £400,000. We took out a £50,000 loan to pay the inheritance tax (IHT) in order to get probate. The house went on the market early this year, just as demand collapsed. The agent says we may have to go to auction and we are likely to get £50,000 less than the probate figure. Will HM Revenue and Customs recalculate the IHT on the basis of the realised price and take into account the interest on the loan as an allowable expense?

Maggie Fleming writes:

Yes, HMRC will recalculate the IHT. Where the executors sell property for less than the probate value within four years of the death, they can elect to use the sale price instead of the value at the date of death and any IHT overpaid will be refunded. This does not apply if the property is sold to one of the beneficiaries under the will, or to their spouse or civil partner, child or grandchild, or to a trust in which any of these people has a life interest. Furthermore, the election applies to all sales of properties in the estate; you cannot elect for some and not for others. A claim should be made on form IHT38, which you can download from the HMRC website.

The interest on the loan taken out to fund the IHT bill is not an allowable expense for IHT purposes, but it can be set off against the estate's taxable income. The relief is available for up to one year. There are various conditions. It must be a separate loan account and not an overdraft on an executor's normal current account. Relief is given against the estate income for the year in which it is paid.

If there is not enough estate income to absorb it in that year, relief will be given, first, against an earlier year and then against a later year.

Are there any consequences to bear in mind if I raise substantial equity in my property through a home-reversion plan and hand the cash on to members of my family? I would expect to retain only a small share of my property so that on death or on entering care when the property would be sold - and assuming that I live for more than seven years - I would avoid inheritance tax on the share already given away. Are the tax implications any different if I spend the money on luxury holidays and other things for my family instead?

Maggie Fleming writes:

Gifts to family members are Potentially Exempt Transfers (PETs) and will not be liable to inheritance tax (IHT) provided you live for seven years afterwards. This applies to cash and assets. In the case of a holiday, however, HMRC may take the view that the recipient should pay IHT immediately at the lower lifetime rate of 20 per cent because the value of his/her estate has not been increased by the gift.

With some gifts you do not have to wait seven years until they fall out of your estate. First of all, there is the annual exemption; everyone can give away £3,000 per annum without any IHT consequences. The relief can be carried back one year so, if you did not use your allowance in 2007/08, you could give away £6,000 tax-free now. You can also give your spouse any amount of money tax-free; he/she could then use up their annual exemption by passing some on to family members.

You can also give away up to £250 per annum to any number of different donees, and make exempt gifts to anyone who is getting married or entering a civil partnership. A valuable exemption, often overlooked, is that for "normal expenditure out of income". It may not apply in your case, but if you do have spare income over and above your needs, you can make regular payments to family members without IHT consequences.

Finally, don't forget that IHT is only an issue if your estate on death, plus any transfers during the previous seven years, exceeds the nil rate band - currently £312,000. If your spouse pre-deceases you and does not use up his/her nil rate band, the remainder can now be added to yours. In many cases, this will double the nil-rate band available on death.