Do you have to pay taxes when you inherit a house in the UK?

There are many questions that revolve around property inheritance, and they often need answers at a highly emotional time, such as what to do with the property (such as sell it or move in yourself), whether or not there are still mortgage payments to be made on it and, crucially, what your legal obligations are in terms of stamp duty, inheritance tax and capital gains tax.

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We’re going to walk through the steps and give you as much information as possible, so that if you find yourself in this position, you don’t have to try and work it all out on your own.

Inheriting a house

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When someone dies, the first thing you need to do is find the deceased person’s will. You may be named as the executor (meaning you’re responsible for sorting out the estate) or you may be named as a beneficiary (meaning you will receive a share of the estate after probate has been granted – more on this later). Either way, when there’s property involved it’s important to work out what your relationship is to it from a legal point of view.

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If the deceased has not left a will they are said to have died ‘intestate’ and the estate will be divided according to intestacy law, although the next of kin can make an application for a grant of administration to prove they are legally allowed to deal with the estate.

Intestacy Law

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Intestacy Law distributes your estate (that is, all your assets at time of death) following a strict order of priority.

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If you’re married but have no children, your spouse or civil partner receives everything.

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If you’re married and have children, everything up to the value of £250,000 and half of anything left over goes to your spouse/ civil partner. The other half of the remainder is split equally between your children.

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If you’re not married but have children, everything is shared out equally to your children.

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If you’re not married and have no children, your estate will be shared out equally to one of the following groups (provided they’re alive) in the following order of priority

1. Parents
2. Siblings (or their children, if the sibling has died)
3. Grandparents
4. Aunts and Uncles

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If you live with someone but aren’t married or in a civil partnership, your partner isn’t legally entitled to any of your estate (no matter how long you’ve been together). If your partner has children that aren’t biologically yours (and you haven’t legally adopted them), they’re also not entitled to any of your estate, no matter how long you’ve been in their lives.

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It’s possible to challenge intestacy law, however it can be a drawn-out and painful process.

Probate

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When someone has left a will, probate is the legal process of sorting out their legal affairs.  This will be done by the executor of the will: they will need to compile and evaluate any assets (ie money and property) and pay any outstanding bills and tax (including inheritance tax – we will talk about this further on) before anything can be distributed. Be aware, this can take up to a year to complete as it can be quite a complicated process as the executor will first need to apply for a grant of probate, a legal document that allows the executors to formally deal with the estate. This can take up to six months to be granted.

Establishing the mortgage status and transfer of ownership

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It’s really important to check the mortgage status on the property: if it still has a mortgage then you will need to contact the lender to explain the situation. There’s a grace period on most mortgages so that repayments are suspended whilst the estate is sorted out.

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Once the property has been legally transferred to its new owner, they will then automatically become responsible for the mortgage repayments, even if they don’t live there. If there isn’t money in the estate to pay off the mortgage, there are two options available: selling the property and using the money to pay everything off, or taking out a new mortgage in your own name.

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When probate has been completed, ownership should be registered at the Land Registry – you need to do this if the property is sold or mortgaged as it will make dealings more straightforward in the future.

Tax matters

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It’s crucial to understand your tax obligations when it comes to inherited property and paying either inheritance tax or capital gains tax.

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Inheritance tax (or IHT) may be payable depending on who a property has been left to (for instance, there is nothing owed if it’s left to a spouse or civil partner), but if the estate has been left to other people or relatives and is above a particular size, tax then becomes payable. Generally, the allowable threshold is £325,000, and after that threshold has been reached, everything else is taxed at a rate of 40%, however these thresholds may vary depending on how many people are named as beneficiaries.

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The executor of the will is responsible for paying Inheritance Tax (or IHT) and it will normally be paid from money within the estate (or funds raised by selling assets within the estate).

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Paying inheritance tax can be incredibly complicated if you’re the executor and the beneficiary. HMRC require that IHT is paid within six months, but as mentioned before, probate can take a lot longer than that. Furthermore, probate is generally only granted (and therefore assets released) once IHT has been paid – something of a paradox! There are a number of solutions available to pay the IHT obligation, but it’s best to speak to a tax adviser to find out what your best options will be.

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If you plan to sell the property and it’s not your main residence, you may be liable for Capital Gains Tax (or CGT). CGT is the tax paid on any profit you might make when selling an asset, and how much you pay will be dependent on your personal income allowance and whatever profit is made from selling the property.

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Again, this is where a tax adviser will come in handy as the combined amounts may put you into a different income tax band.

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We’re aware of how complicated this will sound – but you needn’t try and figure it all out by yourself. If you’d like advice on dealing with the financial matters around inheriting a property, get in touch today – we’re here to help!

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