A property I inherited was overvalued by £50k – can I get any IHT back?

I have inherited a rental property, which was the second property of the deceased, and was passed to me through the estate in late 2016.

I am at the stage of selling the property. 

However, the Royal Institution of Chartered Surveyors approved surveyor who did the initial valuation, based on recent sale prices over the past six years, overvalued the property by around £50,000 I believe.

This constitutes £20,000 in tax at 40 per cent from the time.

As I was the executor of the will also, there was so much going on and I didn’t bat an eyelid or question it at the time.

Given this situation, and that I am now selling the property (which is still in the same liveable condition), but at below the price it was valued at six years ago, do I have any opportunity to have this reviewed to reduce my tax bill?

This has secondary impacts because if I sell below the old valuation, I have paid 40 per cent inheritance tax, and now with the growth over the last six years I also wouldn’t be able to use any capital gains allowance from its growth over those years, so it is a double whammy.

Any guidance is appreciated! I have contacted the chartered surveyor and they are reviewing my request, but I am unsure on what I can do directly with the estate solicitors and HMRC to reverse this tax charge.

Heather Rogers replies: When someone dies and probate is required so the executors can administer the estate, their assets are valued as at the date of death for inheritance tax purposes.

These valuations are then reported to HMRC on the appropriate form and inheritance tax is paid if due, before probate is granted.

I will outline the rules regarding valuations for probate and what happens if a change is necessary, before dealing with your particular situation.

How are assets valued for inheritance tax?

Assets consist of the cash and bank balances at date of death, shares, land and property, other items such as works of art and jewellery, and anything else owned by the deceased.

The executors named in the will are responsible for valuing the assets at the date of death and also dealing with the administration of the estate, collecting monies owed to it and paying bills owed by it.

They may also need to sell assets which are not being passed directly to beneficiaries, and they should get the best price they can within reason.

It is usual and advisable to have a professional valuation carried out for non-cash assets.

In the case of properties, mostly the valuations are prepared by a surveyor as opposed to an estate agent, although both are used.

The surveyor will visit the property and prepare a report and they will usually look at recent comparable property sales to ensure that their valuation is fair and just.

If there is a query by HMRC on the valuation submitted, for example if they think it’s too low, they will send out a District Valuer from the Valuation Office Agency to give their opinion.

If the District Valuer disagrees with the valuation, they will work with the executors to ensure a fair figure is reached.

Shares and other assets such as works of art will be valued at open market value.

The assets may be passed directly to the beneficiaries in line with the will, or they may need to be sold to pay the beneficiaries’ shares of the estate.

It is important to make sure the assets are valued correctly, to ensure the right amount of inheritance tax is paid and avoid any investigations by HMRC.

This could give rise to further tax being due after all the assets have been distributed, which would then be the responsibility of the executors – if errors occur, executors can be personally liable.

Being an executor is therefore not a role that should be taken lightly.

An executor can delegate their responsibilities to a solicitor or other professional if they wish. It is always best to take professional advice if in doubt.

What happens if a sale price differs from the value submitted to HMRC?

As explained above, executors are responsible for ensuring that a sale price is the best they can reasonably obtain.

If you sell a qualifying investment (listed shares, unit trusts, government bonds) at a lower value within 12 months you have five years from the date of death to submit a claim for a refund on inheritance tax from HMRC.

If you sell a property or land within four years of the date of death for a lower value, then you have seven years from the date of death to make the claim for a refund.

However, it must be noted that a claim can only be made if the reduction in value is £1,000 or 5 per cent of the value of the asset at the date of death, whichever is the lower.

When making a claim for a reduction in value you need to be clear why.

If the asset is sold for more than the probate value reported, an adjustment may need to be made and further tax, if due, may need to be paid to HMRC as they will be keen to substitute the sale value for the original valuation.

However, you may find you can challenge this depending on the timing and this may need the District Valuer’s opinion. There may be capital gains tax considerations by the estate if this happens.

What about the property valuation in your case?

The property for which you were executor and also have inherited is being sold after the four-year period from the date of death, so no claim can be made for a refund of inheritance tax.

However, you have already taken up this matter with the surveyor and you may want to pursue it if you feel they were negligent.

There is always a margin of error accepted in fair valuations, which varies but often is around 10 per cent.

I don’t know the value of the property which you feel has been overvalued. 

If the property was worth only £150,000 for example, then a £50,000 overvaluation would be material, but if it is worth £450,000 then it would be much less so.

Remember that many factors can affect the current valuation of the property, including whether it requires upgrading, its energy efficiency and other environmental factors, such as developments taking place nearby.

So, it may not be that an error occurred in the initial valuation, but that factors have changed and affected its current value.

In my experience it is unusual for a surveyor to overvalue for probate – an estate agent may be more optimistic on the valuation, since they may be more focused on the best price they could sell a property for on your behalf.

If of course you feel a genuine error has occurred, you will need to negotiate with the surveyor in this case.

However, if it is six years or longer following their report, it might now be too late even if you feel they were negligent, as you may be time barred from bringing any legal claim.

Tax concern: A property I inherited was overvalued by £50k, so can I get any IHT back?

What about capital gains tax?

Hopefully I can set your mind at rest over CGT and any ‘double whammy’.

When you acquired the property via inheritance, you did so at the probate value.

When you sell an asset in these circumstances, you pay capital gains tax on your profit made over and above that value, subject to allowable costs and your capital gains allowance (see the box above, and my previous column on CGT here).

If you sell the property for less than the amount you acquired it for, then you will not pay any capital gains tax but will have a capital loss you can carry forward to offset against any future gains.

You will still have to notify HMRC by submitting a Property Disposal Report within 60 days of the completion date of the sale.