UK Families Losing Thousands by Skipping This Little-Known Inheritance Tax Relief: Inheritance Tax (IHT) in the UK is one of the most misunderstood and under-planned-for taxes. Every year, UK families collectively lose millions of pounds by not taking full advantage of legitimate reliefs and exemptions. While many are aware of the basic IHT allowances, there are several little-known yet powerful reliefs that, when skipped, result in substantial and entirely avoidable losses.
In this article, we’ll explore two of the most overlooked reliefs – Loss on Sale Relief and Gifts Out of Surplus Income. We’ll explain how they work, provide practical advice for applying them, and share why they’re so often missed. Whether you’re planning your own estate or managing someone else’s, this guide will help ensure you aren’t giving the taxman more than you need to.
UK Families Losing Thousands by Skipping This Little-Known Inheritance Tax Relief
Inheritance Tax is often called a “voluntary tax” — not because it’s optional, but because so much of it is avoidable with the right planning. Families across the UK lose thousands, even tens of thousands of pounds, by skipping reliefs they could legally and easily claim.
The two most commonly missed are Loss on Sale Relief and Gifts Out of Surplus Income. By understanding how they work and implementing them proactively, you can preserve more of your hard-earned wealth for the next generation. Estate planning is not just for the ultra-wealthy — it’s for anyone who wants to make the most of their legacy.
| Aspect | Details |
|---|---|
| Standard IHT Rate | 40% on estates above the £325,000 nil-rate band |
| Residence Nil-Rate Band | Additional £175,000 allowance when passing a main residence to direct descendants |
| Loss on Sale Relief | Allows reclaim of IHT if inherited assets like shares or property are sold at a loss within 12 months (shares) or 4 years (property) |
| Gifts Out of Surplus Income | Enables individuals to make regular, tax-free gifts from surplus income, without affecting lifestyle or being subject to the 7-year rule |
| Time-Sensitive Claims | Claims must be made within 4 years (property) or 1 year (shares) of the asset’s sale |
| Official HMRC Guidance | HMRC Inheritance Tax Reliefs |
Understanding the Basics of Inheritance Tax in the UK
Inheritance Tax is charged at 40% on the portion of an estate that exceeds the nil-rate band (currently £325,000). An additional residence nil-rate band of £175,000 may apply if the deceased owned a home and left it to direct descendants. This means that a married couple or civil partners can potentially pass on up to £1 million tax-free.
But with property prices rising and the thresholds frozen until at least 2028, more families are finding themselves unexpectedly subject to IHT. Knowing how to plan ahead — and what reliefs you can claim — makes a huge financial difference.
Loss on Sale Relief: Claiming IHT Back When Inherited Assets Lose Value
What Is It?
Loss on Sale Relief applies when you inherit assets (usually quoted shares or property) that decline in value before you have a chance to sell them. If the assets are sold at a lower value within a specific time frame, you may reclaim the difference in tax paid.
How It Works
There are two primary categories where this relief applies:
- Quoted Shares: If sold within 12 months of the date of death.
- Property or Land: If sold within 4 years of the date of death.
In both cases, the relief allows the executor to reclaim a portion of the IHT originally calculated on the higher value at the date of death.
Key Conditions
- The sale must be genuine and at arm’s length (i.e. to a third party, not a family member).
- The relief can only be claimed if the loss exceeds any gains made on other similar sales within the same timeframe.
- The claim must be made using Form IHT35 (for shares) or IHT38 (for property) and submitted to HMRC within the statutory period.
Real-World Example
Let’s say you inherit a portfolio of shares valued at £150,000 on the date of death. Due to market downturns, the shares are sold 10 months later for £120,000. The estate would have paid IHT on the £150,000 value, but with Loss on Sale Relief, it can reclaim IHT on the £30,000 loss — potentially saving £12,000 (40% of £30,000).
Gifts Out of Surplus Income: A Little-Known but Powerful Exemption
What Is It?
The Gifts Out of Surplus Income exemption allows you to make unlimited gifts that are immediately outside of your estate for IHT purposes — with no need to survive seven years, as required by other types of gifts.
Criteria You Must Meet
- Gifts Must Be Regular: There must be a demonstrable pattern of gifting (e.g. annually).
- Gifts Must Come from Income: The money must come from your income, not capital.
- Lifestyle Must Be Unaffected: You must maintain your usual standard of living after making the gifts.
What Counts as “Surplus Income”?
Surplus income is anything left over after your normal living expenses — including household bills, leisure activities, travel, and other lifestyle costs. Salary, pensions, dividends, and rental income may all qualify as “income.”
Required Documentation
This exemption requires meticulous record-keeping. HMRC expects to see:
- Evidence of your total income and outgoings.
- Records of the gifts made, showing frequency and amounts.
- Proof that the gifts did not affect your ability to live comfortably.
Maintaining a spreadsheet or using your accountant to track this is highly recommended.
Practical Example
A retired individual receives a private pension and state pension totalling £50,000 annually. Their annual living expenses are £35,000. They give £5,000 each year to their child to help with university tuition. Since the gift is from income, is regular, and doesn’t affect their lifestyle, it’s fully exempt from IHT — immediately.
Why UK Families Losing Thousands by Skipping This Little-Known Inheritance Tax Relief?
Despite the financial advantages, these reliefs are frequently underutilized. Here’s why:
- Lack of Publicity: These exemptions are buried in HMRC’s guidance and rarely promoted.
- Complexity: The technical nature of the conditions puts many people off, especially without professional help.
- Time Sensitivity: Many executors simply miss the deadlines to file the correct forms.
- Assumption of Irrelevance: Families assume IHT doesn’t apply until they’re far wealthier than they are.
According to data from HMRC, fewer than 2% of estates use the Gifts Out of Surplus Income exemption, despite it being available to many pensioners and high-income households.
Practical Guide to Taking Advantage of These Reliefs
To ensure you benefit from these exemptions, follow these steps:
1. Assess Your Estate Value
Get professional valuations of property, shares, pensions, and possessions. Knowing the size of your estate is the first step in determining tax exposure.
2. Keep Thorough Financial Records
Document your income, expenses, and gifts carefully. This will support any claim you need to make for gifts out of surplus income or loss on asset sales.
3. Get Professional Advice
Consult a qualified estate planner, solicitor, or tax adviser. A professional can help navigate forms, meet deadlines, and optimize the structure of your estate.
4. Regularly Review Your Estate Plan
Tax rules and personal circumstances change. Set an annual review to ensure your estate strategy still meets your goals.
5. File Timely Claims
Be aware of the deadlines for Loss on Sale Relief:
- Shares: 12 months from death
- Property: 4 years from death
If you miss these windows, the relief is gone for good.
Inheritance Tax Uproar in Birmingham — Expert Says Family Feuds Are Inevitable
DWP Fine of Up to £5,000: Some Benefit Claimants May Receive Notification Letters! Check Details
HMRC Responds to Backlash Over New Rule Targeting Pre-1945 Pensioners
Frequently Asked Questions (FAQs)
Q1. Do I need to survive seven years for Gifts Out of Surplus Income to be exempt?
No. Unlike Potentially Exempt Transfers (PETs), these gifts are immediately outside your estate if all conditions are met.
Q2. Can gifts to anyone be exempt under surplus income?
Yes, gifts can be made to children, grandchildren, friends, or even charities — as long as they meet the criteria.
Q3. How do I prove that gifts came from surplus income?
HMRC expects detailed records showing your income, expenses, and that the gifts didn’t reduce your standard of living.
Q4. What if the value of inherited property drops before sale?
You may be eligible to claim Loss on Sale Relief using form IHT38, provided the sale is within 4 years of death.
Q5. Can these reliefs be used in combination?
Yes. They are separate reliefs and can be used simultaneously to maximize tax savings on an estate.
