Selling inherited property below or above probate value: the tax rules

When someone dies, their property is valued for inheritance tax at the date of death. That figure — the probate value — then follows the estate around for years. But markets do not stand still while executors gather in the paperwork. By the time a buy-to-let flat or a parcel of land is actually sold, it may fetch noticeably less than the figure HMRC taxed. Or noticeably more.

Either way, the tax position changes. If the property sells for less, the estate may have paid inheritance tax on value that never existed — and there is a relief to put that right. If it sells for more, the gain since death is a capital gain, and the executors may owe capital gains tax on it, often with a tight 60-day deadline. For property investors in particular, understanding both sides is part of planning a sensible estate.

When the sale price is lower: loss on sale relief for land and buildings

The law allows the executors, in the right circumstances, to replace the probate value of land and buildings with the price they actually achieved on sale. HMRC calls this loss on sale of land relief, and it is claimed on form IHT38.

The main conditions are these:

• The sale must be made by the “appropriate person” — usually the executors, being the people liable to pay the inheritance tax on that property. A sale by a beneficiary after the property has been passed to them does not qualify, and HMRC warns that relief may not be available if the claim is made after the property has been distributed.
• Inheritance tax must actually be payable. If no tax is due — for example, because everything passes to a surviving spouse — there is no appropriate person and nothing to claim.
• The sale must take place within four years of death. Sales in the first three years count whether they are at a loss or a gain. Sales in the fourth year count only if they are at a loss.
• The difference must be worth claiming. No relief is given where the sale price differs from the probate value by less than £1,000 or 5% of the probate value, whichever is lower.
• The sale must be at arm’s length. A sale to a beneficiary, or to their spouse, civil partner, children or grandchildren, is normally excluded.

The figure used is the gross sale price. Estate agents’ commission, legal fees and similar selling expenses are not deducted for this purpose. The claim itself has a time limit too: it must be made within four years of the end of the three-year sale period.

The aggregation rule

This is the part that catches people out. Once the executors claim the relief, it is not a matter of picking the property that fell in value. The sale price of every interest in land sold by the executors in the period is substituted for its probate value — including any sold for more than probate value in the first three years. A strong sale of one property can therefore cancel out much of the relief on a weak sale of another.

Buying other property can wipe out the relief

The relief is designed for estates that genuinely sell property — to pay tax, debts or legacies. If the executors buy other land or buildings between the date of death and four months after the last qualifying sale, the relief is reduced. If what they spend on purchases equals or exceeds the total sale proceeds, no relief is due at all. Executors who intend to keep a property portfolio running inside the estate should take advice before buying anything.

Quoted shares and unit trusts: a 12-month window

A parallel relief applies to listed shares and securities and holdings in authorised unit trusts, claimed on form IHT35. The window is much shorter: the shares must be sold by the executors within 12 months of death. Again, all such sales in that year are added together, and there must be an overall loss across the lot. Buying other quoted shares between death and two months after the last sale reduces the relief proportionately.

Where either claim succeeds, the inheritance tax is recalculated on the lower figure and HMRC repays the difference. The lower figure also becomes the value from which any later gain is measured, so there is no separate capital loss to claim on top.

When the sale price is higher: capital gains tax for executors

Death itself is not a capital gains tax event. The executors are treated as acquiring the deceased’s assets at their probate value, which wipes out any gain built up during the deceased’s lifetime. That is a valuable feature for long-held property.

But any growth after death belongs to the estate. If the executors sell a property for more than its probate value, the gain is taxed on the estate, not on the beneficiaries. The points to know:

• Rate: for disposals on or after 30 October 2024, executors pay capital gains tax at 24% on all gains, including residential property.
• Annual exempt amount: executors receive the full annual exempt amount — currently £3,000 for 2026 to 2027 — for the tax year of death and the two following tax years. One allowance per year, however short the first period. After that, there is no allowance at all.
• Allowable deductions: the gain is reduced by the selling fees — estate agent and legal fees on the sale — and HMRC also allows a share of the fees of obtaining probate and administering the estate.
• The 60-day rule: where executors sell UK residential property at a gain that leaves tax to pay, they must report it to HMRC within 60 days of completion. Executors file the online return, and HMRC then writes with the amount due and how to pay it.

A worked example

Take a Sussex couple, Peter and Anne, both property investors. The names and figures are purely illustrative. Peter dies first and leaves everything to Anne, so no inheritance tax is due on his death. When Anne later dies, her estate is well above the nil-rate bands, and the estate pays inheritance tax at 40% on the excess. Among her assets are two buy-to-let flats in Worthing.

Flat A has a probate value of £300,000. The market softens, and 18 months after Anne’s death the executors accept £270,000. The difference of £30,000 is comfortably above the threshold, so they claim loss on sale relief on form IHT38. On its own, that would reduce the taxable estate by £30,000 and produce an inheritance tax refund of £12,000.

Flat B has a probate value of £250,000 and is sold within the same three-year period for £262,000. Because of the aggregation rule, that £12,000 uplift must also be brought in. The net reduction in the estate is £18,000, and the refund falls to £7,200. Still worth having — but a long way short of the £12,000 the executors might have expected.

Now suppose instead that Flat A had sold for £330,000. There is no inheritance tax relief to claim. Instead there is a £30,000 gain since death. Deduct, say, £6,000 of selling fees and the executors’ £3,000 annual exempt amount, and £21,000 is taxed at 24% — £5,040 of capital gains tax, to be reported within 60 days of completion.

The traps

• Selling in the wrong order or at the wrong time. Because every land sale in the period counts, a gain on one property can erode relief on another. A loss in the fourth year counts; a gain in the fourth year does not.
• Passing the property to a beneficiary first. If the property is transferred out of the estate and the beneficiary sells it, the executors cannot claim the relief.
• Buying while selling. Reinvesting sale proceeds in other property during the window can reduce or remove the relief entirely.
• Missing the 60-day deadline. Late reporting brings penalties and interest. A gain can arise even where the executors feel they have barely held the property.
• Running out of allowances. Estates that take more than the tax year of death and two further years to sell property get no annual exempt amount at all.
• Treating a low valuation as a saving. A lower probate value means less inheritance tax, but it also means a lower starting point for capital gains tax, so more of any later sale price is taxed as gain. HMRC also looks closely at values that later turn out to be well below the sale price.

What to do

For anyone who owns property and expects their executors to sell some of it, a few steps make a real difference:

• Insist on proper RICS valuations at death. An honest, well-evidenced market value is the best starting point for both taxes, and it stands up if questioned.
• Keep good records. Completion statements, agents’ fees, legal fees and tenancy details all matter — HMRC asks for a full completion statement with an IHT38 claim, and the same paperwork supports the capital gains calculation.
• Plan the timing of sales. Executors should look at the whole portfolio before agreeing any sale, thinking about the three- and four-year windows, the 12-month window for shares and the annual exempt amounts available in each tax year.
• Consider whether the estate or the beneficiaries should sell. Sometimes it suits everyone for the executors to sell; sometimes passing a property to a beneficiary who will keep it is better. The answer depends on the inheritance tax position, the beneficiaries’ own tax rates and their plans.
• Choose executors who understand property. A well-drafted Will that gives executors clear powers to manage, let and sell property — and appoints people able to use them — makes all of this easier.

The short version

The probate value is not the end of the story. If property sells for less within four years, the estate may be able to reclaim inheritance tax. If it sells for more, capital gains tax may be due, quickly. Good valuations, good records and a clear plan for selling turn both outcomes from a surprise into a decision.

If you own property and would like to know how your estate would be handled, book a Discovery Call with me. It takes 30 minutes, the fee is £30, and that is credited against your fees if you go on to instruct us.