Understanding the probate process - The Inheritance Tax rebate debate

It was revealed earlier this year by the insurer NFU Mutual that there could be tens of thousands of estates in the UK on which inheritance tax has been significantly overpaid. The figures estimated that some 21,000 estates may be due inheritance tax rebates of around £4,000 per estate. This means that in total, some £90 million has been overpaid in the probate process and is currently sitting inactive in the taxman’s coffers and waiting to be claimed back by the rightful owners.

This glitch is the result of fluctuations in the value of residential property – something that often makes up part of an estate when the owner dies - and a lack of understanding on the part of beneficiaries as to how inheritance tax on these properties works. The situation is underpinned by falling house prices in the UK, which have dropped by 11% in the last four years, and which may have led to a number of properties being sold for less than the amount that they were valued at when probate was processed. If a property is sold at this lower value within four years of the death of the owner (which often is the case), then it is possible to claim back some of the inheritance tax paid on the higher valuation of the property during probate via a rebate.

The Land Registry has estimated that those who inherited a property during the months of June 2008 - February 2009 and June 2010 - August 2011 are the most likely to be due a rebate on their inheritance tax, as these are the times at which house prices fell the most. The rebates are also applicable to other types of property, such as shares, investments and unit trusts that were sold within twelve months of the date of the estate owner’s death. Inheritance tax on properties is quite substantial – 40% on anything above the set threshold (currently £325,000) – and this is paid within six months of the death, before any distributions in the will are made, and also before any debts are paid off from the estate. The rebate on that 40% can be quite significant – up to £4,000 – and for most beneficiaries this can have quite an impact on inheritance.

This rebate issue is just part of the wider problem of people becoming involved in the probate process without fully understanding it, as it is not just individuals who are administering probate who should be sure that they grasp its purpose, and how to achieve it effectively, but also the person whose estate will pass on death. The beneficiaries also take a risk by not being fully involved in the probate process and conscious of the various twists and turns. Smart estate planning can minimise the complications during what is already a difficult time; taking some simple steps will ensure that most of what is left behind is passed as intended to nearest and dearest, rather than ending up unclaimed in the hands of the taxman.