Inheritance Tax (IHT) in the UK continues to catch families off guard, costing them thousands of pounds unnecessarily. While many are aware of the £325,000 nil-rate band and the residence nil-rate band, far fewer know the lesser-known reliefs that can make a huge financial difference. Two of the most overlooked reliefs are Loss on Sale Relief and Gifts Out of Surplus Income. Missing out on these could mean giving HMRC far more than required.
Let’s look into how these reliefs work, why they’re missed, and how you can use them to keep more of your estate in the family.
Snapshot
| Aspect | Details |
|---|---|
| Standard IHT Rate | 40% on estates over the £325,000 threshold |
| Residence Nil-Rate Band | Additional £175,000 for main home left to direct descendants |
| Loss on Sale Relief | Reclaim IHT on assets sold for less than probate value (within time limits) |
| Gifts Out of Surplus Income | Make regular, tax-free gifts from income without affecting lifestyle |
| Claim Deadlines | 1 year (shares), 4 years (property) from sale |
| Official Guidance | Available from HMRC’s Inheritance Tax Reliefs section |
Inheritance Tax
IHT is charged at 40 percent on the value of an estate that exceeds the nil-rate band. Couples can combine their allowances to pass on up to £1 million tax-free, assuming the residence nil-rate band applies. However, rising property values and frozen thresholds are pushing more estates above these limits, meaning more families are paying tax — sometimes unnecessarily.
Loss on Sale Relief
This relief allows executors to reclaim a portion of IHT if assets inherited are sold at a loss within a set period.
- Shares: Must be sold within 12 months of death
- Property: Must be sold within 4 years of death
The relief applies to the difference between the probate value (used to calculate IHT) and the actual sale price.
Key Conditions
- The sale must be at market value to an unrelated party
- The loss must exceed any gains from other asset sales of the same type
- The claim is made using HMRC Forms IHT35 (for shares) or IHT38 (for property)
Example
If you inherit shares valued at £150,000, but they sell 10 months later for £120,000, the estate can reclaim IHT paid on the £30,000 loss — saving up to £12,000.
Gifts Out of Surplus Income
This exemption allows individuals to make unlimited tax-free gifts from their income without needing to survive seven years — unlike other types of lifetime gifts.
Criteria
- Gifts must be regular (such as annual or monthly)
- They must be made from income, not capital
- Your lifestyle must remain unaffected after gifting
What Counts as Income
- Salary or pension income
- Rental income
- Dividends or interest
Your “surplus” is what’s left after everyday living costs — housing, food, travel, and leisure.
Documentation Required
- A record of total income and outgoings
- A log of all gifts made
- Evidence that the gifts didn’t reduce your living standard
Keeping spreadsheets or working with an accountant is advisable.
Example
A pensioner earning £50,000 a year and spending £35,000 may give £5,000 a year to a child for tuition. If the gifts are regular and come from income, they’re exempt from IHT immediately.
Why These Reliefs Are Missed
Despite the benefits, many people don’t claim these reliefs. Here’s why:
- They’re buried in complex HMRC guidance
- Most executors don’t realise claims must be filed within strict timeframes
- People wrongly assume IHT only applies to the very wealthy
- Record-keeping for surplus income gifts can feel daunting
In fact, fewer than 2 percent of estates use the Gifts Out of Surplus Income relief — a missed opportunity for many families.
How to Take Advantage
Here’s how to make sure you’re not overpaying IHT:
1. Know Your Estate Value
Get valuations for all assets including property, pensions, savings, and investments. This helps assess whether IHT applies.
2. Document Your Finances
Keep a clear log of income, expenses, and any gifts made. This supports both surplus income gifts and potential future claims.
3. Seek Expert Help
A solicitor or tax adviser can help navigate complex forms like IHT35 and IHT38, and make sure you don’t miss important deadlines.
4. Review Regularly
Life and tax rules change. Make it a habit to review your estate plan every year or after major life events.
5. File Claims on Time
- For shares: claim Loss on Sale Relief within 12 months of death
- For property: claim within 4 years of death
If you miss these windows, the chance to reclaim IHT is lost forever.
FAQs
What is Loss on Sale Relief?
A way to reclaim IHT if inherited assets are sold at a loss.
When must surplus income gifts be made?
They must be regular and from income, not capital.
How do I claim IHT relief on shares?
Use HMRC Form IHT35 within 12 months of death.
Does IHT apply to everyone?
No, only estates over the £325,000 threshold pay IHT.
Is professional advice needed for IHT planning?
Yes, it helps ensure claims are valid and deadlines met.
