How Inheritance Tax Refunds Actually Work When Asset Values Fall
Thousands of UK estates are reclaiming inheritance tax after discovering that property or shares sold for less than their original probate valuations. According to data published by HMRC, more than 6,000 estates reclaimed over £300 million in a single tax year, with the average refund exceeding £50,000.
The attention is not about a rule change. It is about timing, valuation pressure, and falling asset prices colliding with a tax system that requires payment before real-world sale outcomes are known. For executors, the issue is procedural rather than theoretical: money leaves the estate early, and reclaiming it later is neither automatic nor simple.
Why Inheritance Tax Is Paid Before Anyone Knows the Final Value
Inheritance tax is calculated using asset values at the date of death, not at the eventual sale date. Executors must estimate what property and investments would reasonably sell for at that point in time, even though the estate may not be sold for months or years.
In practice, this creates a mismatch. Tax is due within six months of death, while probate, marketing, negotiations, and market shifts happen later. If asset prices fall during that gap, the estate may have paid tax on value that never materialises.
What many people assume is a final calculation is, in reality, a provisional one.
What Actually Happens After an Overvaluation Is Discovered
The process begins only after a sale has completed at a lower price than the probate valuation. HMRC does not reassess estates proactively, even when markets fall.
For property, the executor must submit form IHT38. For shares or investments, the equivalent is IHT35. Each form requires evidence of the original valuation, the eventual sale price, and confirmation that the sale occurred within a strict time window.
For property, that window is four years from the date of death. For shares, it is one year. Miss the window, and the overpaid tax remains with HMRC, regardless of how far values have fallen.
Once submitted, the claim enters HMRC’s processing system. At this point, money is not refunded immediately. The claim is reviewed, cross-checked against probate records, and sometimes queried if HMRC believes the original valuation was optimistic or poorly supported.
Where the Money and Risk Actually Move
Inheritance tax is paid out of estate funds, often before beneficiaries receive anything. When an overpayment occurs, the estate is effectively lending money to the Treasury until a reclaim is approved.
Refunds, when accepted, are paid back to the estate, not directly to beneficiaries. If distributions have already been made, executors may face internal accounting adjustments or beneficiary disputes.
Interest can be added to refunds, but the rate paid by HMRC is materially lower than the interest charged on late tax payments. This asymmetry often surprises executors who assume the system is neutral.
A Real-World Estate Example
In 2023, an estate in southern England valued a detached home at £1.15 million based on comparable listings at the time of death. Inheritance tax was paid accordingly.
The property remained empty during probate, suffered minor deterioration, and was eventually sold 18 months later for £980,000 after two failed sales. The executor submitted an IHT38 reclaim.
The claim was accepted, but processing took several months due to valuation review queries. The estate recovered over £60,000 in tax, plus limited interest, but only after cash-flow pressure had delayed distributions and increased legal costs.
The delay did not come from dispute, but from procedural sequencing.
Where Delays and Friction Commonly Occur
The first friction point is valuation quality. Executors are not required to obtain formal surveyor “Red Book” valuations, but weaker evidence increases the chance of HMRC scrutiny later.
The second is timing mismatch. Estates often sell property late in the four-year window, leaving little buffer if paperwork is incomplete or queried.
A third friction point is assumption error. Many executors assume HMRC will adjust tax automatically once sale prices are known. That does not happen.
Expectation vs Reality in Practice
Many people expect inheritance tax to reflect what assets actually sell for. In reality, it reflects what they were expected to sell for at a specific moment in time.
There is also a common assumption that falling markets trigger automatic corrections. Instead, the system places the burden entirely on executors to identify, document, and reclaim overpayments.
The result is that visibility of loss does not equal recovery of tax without deliberate procedural action.
How Market Conditions Have Amplified the Issue
Falling property prices in some regions, combined with longer probate timelines, have increased the gap between estimated and realised values. Empty properties often deteriorate, and probate-only buyers frequently negotiate harder.
Investment assets add another layer. Shares can fall sharply within a year of death, but reclaim deadlines are short and evidence requirements precise.
Industry figures such as NFU Mutual and AJ Bell have pointed to over-optimistic valuations and market volatility as recurring contributors to refunds.
Oversight and Institutional Limits
HMRC’s role is administrative rather than advisory. It assesses claims based on submitted evidence and statutory windows, not on fairness or hindsight.
The government has announced investment in digitalising inheritance tax systems, but this does not change the underlying structure: executors must act, and timing remains decisive. Policy decisions by figures such as Rachel Reeves may increase the number of taxable estates, but they do not simplify refund mechanics.
Oversight exists, but responsibility sits squarely with those administering the estate.
What Remains Unresolved
The system continues to rely on early valuation estimates in a market where pricing certainty often arrives late. Refunds correct overpayment, but only after delay, effort, and administrative risk.
For executors, the unanswered question is not whether refunds exist, but how often overpayment is detected in time, and how much friction occurs before money returns to the estate.
Visibility, in this system, does not guarantee resolution.
