Sold for less than probate:
reclaiming the tax.

Inheritance tax is charged on the value at death. Markets do not always agree.

An estate is assessed for inheritance tax on what its property was worth on the day the owner died, and the tax is often paid long before anything is sold. When the house or the shop then comes to the market and sells for less than that figure, the estate has paid tax on value it never received. There is a statutory remedy for exactly this, and in my experience it is one of the most frequently missed reliefs in estate administration: loss on sale of land relief. Used properly it puts real money back into an estate. Overlooked, or claimed without understanding its mechanics, it does nothing at all.

I prepare the date-of-death figures these claims turn on, and I am asked regularly whether a disappointing sale can be turned into an inheritance tax refund. This article sets out what the relief does, the window it lives in, and the small number of rules that decide whether a claim is worth making.

What the relief actually does.

The starting point is section 160 of the Inheritance Tax Act 1984: property in an estate is valued at the price it might reasonably be expected to fetch on the open market at the date of death. That figure goes on the IHT account, and the tax is calculated on it. If the property is later sold for less, the loss belongs, in effect, to no one: the beneficiaries receive less than the estate was taxed on, and the extra inheritance tax has already been paid.

Sections 190 to 198 IHTA 1984 exist to close that gap. Where an interest in land is sold within a set period after the death, the person who bore the tax can claim to substitute the actual sale price, the sale value, for the date-of-death value under s.191(1). The inheritance tax is then recomputed on the lower figure and the overpayment repaid. It is not automatic. It is a claim, made on form IHT38 by what the statute calls the appropriate person, which in practice means the executors or administrators who paid the tax.

— The principle in one line The relief lets the estate be taxed on what the land actually made, not on what it was once thought to be worth.

The four-year window.

The relief is not open-ended. The sale has to happen within a defined period after the death, and the claim itself has its own deadline. Both are easy to lose sight of in an estate that takes time to administer.

A sale qualifies if it takes place within four years of the death. The statute frames this as a three-year window, with sales made at a loss in the fourth year brought in by s.197A; the practical effect is that a loss-making sale up to four years after death can count. The claim to relief must then be made within four years of the end of that qualifying period, under s.191(1A). Miss either limit and the overpaid tax simply stays paid. For all of these purposes the date of sale is the date of the contract, not completion, under s.198: where exchange and completion fall either side of a deadline, it is exchange that counts, and the timing of exchange can be chosen with that in mind.

There is one timing trap that catches estates repeatedly, and it has nothing to do with dates. The sale must be made by the appropriate person, the party who paid the tax. If the property has already been transferred, or assented, to a beneficiary, and the beneficiary then sells it, the sale is no longer the appropriate person’s and the relief is generally lost. Where a claim might be wanted, the property should be sold out of the estate, not handed over first.

The trap: every sale comes in.

The single most misunderstood feature of the relief is that it is not applied sale by sale. Once the appropriate person claims, every interest in land they have sold within the period is brought in at its sale value, not only the ones that fell. A property that sold for more than its date-of-death figure is dragged into the same calculation, and its gain nets off against the loss you were trying to claim.

For a single house that has fallen in value, this is straightforward and the relief does its job. For an estate holding several properties, it needs thought. If a flat sold for £30,000 below probate value but a shop sold for £40,000 above it, a claim produces no relief at all, and may even confirm a higher aggregate value than was returned. You cannot present the loss and quietly leave the gain out; the aggregation rule in s.191 does not allow it. The arithmetic has to be run across everything before deciding whether to claim.

Two carve-outs soften the rule. First, the fourth year is one-way traffic: the s.197A extension brings in a fourth-year sale only if it was made at a loss, so a property sold above its date-of-death value in the fourth year is simply ignored. Letting a rising property run past the three-year line before exchanging contracts can, on its own, keep its gain out of the calculation. Second, a sale whose price sits within the de minimis band described below is left at its death value entirely, so a marginal gain on one property does not chip away at a genuine loss on another.

There is also a more deliberate escape. The aggregation reaches only sales made by the appropriate person. If the executors appropriate the property that has risen in value to a beneficiary before contracts are exchanged, the beneficiary’s sale is not a sale by the appropriate person and stays outside the calculation altogether; the loss-making property is then sold out of the estate, and the claim runs on it alone. It is the mirror image of the trap in the timing section: the wrong person selling the loser destroys the relief, while the right person not selling the gainer preserves it. The beneficiary’s capital gains tax position needs checking first, and it is a step to take with advice rather than by reflex, but in a multi-property estate it is often the difference between a real refund and none.

Where the relief quietly disappears.

Three further rules narrow the relief, and each of them can turn a claim that looks worthwhile into one that is not.

1. 01

   The de minimis floor.

   Under s.191(2), an interest whose sale price differs from its date-of-death value by less than the lower of £1,000 and 5% of the value on death is left at its death value and drops out of the calculation altogether. It cuts both ways: a modest slip below the probate figure supports no claim, and a marginal gain on one property does not erode a genuine loss on another.

2. 02

   Sales that are not at arm’s length.

   A sale to a beneficiary, a relative, or anyone connected with the estate, or a sale on terms affected by that relationship, is excluded or adjusted under s.191(3). The relief is designed to capture what the open market paid, so a discounted family transfer does not qualify as the sale value.

3. 03

   Buying more land.

   If the appropriate person purchases other interests in land, in the same capacity, between the death and four months after the last qualifying sale, s.192 restricts the relief in proportion, and can extinguish it. Personal representatives who reinvest estate funds in property during the administration can destroy a claim without realising it.

One further point of detail: if the property itself has changed between death and sale, a lease granted, works carried out, planning obtained, the comparison is no longer like for like, and an adjustment is needed so that the relief reflects a genuine fall in value rather than a change in the asset.

Why the date-of-death figure still governs.

Every part of this relief pivots on the date-of-death value, which is why the quality of that original figure matters long after the IHT account is submitted. If the value was set too high in the first place, whether by an optimistic appraisal or an estate agent’s marketing figure pressed into service, the estate overpaid, and a later sale that merely corrects the error is doing the relief’s job by accident. The cleaner position is an accurate, properly evidenced date-of-death valuation from the outset, so that a subsequent sale below it reflects a real movement in the market and not a mistake being unwound.

It also matters because a claim reopens the value. Substituting the sale price only works if that price stands as a true open-market figure, and the Valuation Office Agency will look at it in the same way it looks at any figure referred to it. If the sale was rushed, poorly marketed, or between connected parties, the District Valuer can question whether it represents market value at all. The same evidential discipline that defends a date-of-death figure defends a loss-on-sale claim: a proper marketing history, comparable evidence, and a clear account of the condition and circumstances of the sale.

— The through-line A loss-on-sale claim is only as strong as the two figures it compares, and both of them are valuations before they are numbers.

The same sale, seen by CGT.

A sale out of an estate is looked at by two taxes from opposite ends, and it is a mistake to weigh the inheritance tax relief in isolation. For capital gains tax, the personal representatives’ acquisition cost is the date-of-death value, tied to the figure established for inheritance tax by s.274 TCGA 1992. Reducing the inheritance tax value by claiming loss on sale relief therefore has consequences for the capital gains tax position on the same disposal.

The two cannot sensibly both be maximised. An estate cannot claim a large inheritance tax refund on the basis that the property was worth far less than probate value, and at the same time rely on a high date-of-death base cost to shelter a capital gains tax loss. Which relief is worth more depends on the rates in point, who ultimately bears each tax, and whether the property is held long enough for the gain to matter. The right course is to model both before making the claim, rather than treat the inheritance tax refund as free money.

A note for solicitors and accountants.

If you administer estates, the relief is worth a standing checklist. Where property is likely to be sold within four years of a death, keep the door open: sell out of the estate rather than assenting to a beneficiary first, and be cautious about reinvesting estate funds in land while a claim is in prospect. Where one property has fallen and another has risen, pause before exchanging contracts on the gainer: sold by a beneficiary after appropriation, or after the three-year line, its gain may stay out of the calculation entirely. Diarise the four-year window from the outset, because it closes quietly.

Before claiming, run the aggregate. Where an estate has sold more than one property, the gains and the losses have to be looked at together, and a claim that helps on paper can disappear once every sale is brought in. And if the original date-of-death figure was never prepared to a proper standard, take advice before a claim invites the Valuation Office to reopen it, because a reopened value can move in either direction.

Where I have prepared the date-of-death valuation, I can say quickly whether a later sale is likely to support a claim, and stand behind both figures if the Valuation Office asks. That is usually the most useful thing a valuer can do here: not to produce a number in isolation, but to make sure the two figures the relief compares will hold when they are tested together.