What Tax Do You Pay on Inherited Property in the UK?

Inheriting a property after the death of a family member or loved one is always a trying time and hopefully, there is an estate agent available to help you with any questions you have. Nevertheless, there are legalities and administrative situations that must be addressed by the beneficiary of an inheritance. One of these is Inheritance Tax.

Is There a Tax on Inherited Property?

Inheritance tax is applicable to the entire estate of a deceased family member or loved one, including any property. Inheritance tax is set at a basic rate of 40% on everything above the threshold limit of £325,000.

Any property that is inherited is evaluated at the time of death and its value is added to that's persons total estate value.

Am I Obligated to Pay Inheritance Tax?

Absolutely. Unless you happen to qualify under the few exemptions that would make you exempt from inheritance tax, you are required to pay by the end of the 6th month after the person has died. As an example, if a person died in August, the inheritance tax would be due by the end of February.

Am I Required to Pay Capital Gains Tax on Residential Property That is Inherited?

Capital gains tax is not a tax that is applicable to the process of inheriting a home or property. However, if you choose to sell a home that you have inherited, you will be obligated to pay any capital gains tax on that inherited property, if you have made a profit on the sale of that home or property. This doesn’t apply if the inherited home is used as your main residence. Calculating capital gains tax involves determining the taxable amount after accounting for profits and applicable allowances, and it is crucial to pay it timely to avoid penalties.

For basic rate taxpayers, earning up to £50,270, the CGT rate is 18% on residential properties, which contrasts with higher rates for higher-income earners.

Calculating Capital Gains

Calculating capital gains on an inherited property can be a complex process, but breaking it down step-by-step can make it more manageable. To determine the gain, you need to subtract the probate value of the property from the sale price. The probate value is the value of the property at the time of the deceased’s death, which is usually determined during the probate process.

For example, if the probate value of the property is £200,000 and you sell it for £250,000, the gain would be £50,000. From this gain, you can deduct any allowable expenses, such as solicitors’ fees, surveyors’ fees, and costs of improvements, to arrive at the taxable gain.

It’s essential to keep accurate records of the probate value, sale price, and any expenses incurred to ensure you calculate the capital gain correctly. You may also want to consider consulting a tax professional or financial advisor to ensure you are taking advantage of all the available reliefs and allowances.

What if I Am Selling the Property?

If at the time of inheritance, the home is evaluated at £300,000 and you then decide to sell it for £350,000, you will owe capital gains tax on £50,000. Your capital gains rate is determined by your income in that tax year and whether you are a basic, higher, or additional-rate taxpayer. CGT liability arises when selling inherited property, and understanding how to minimize this liability through various exemptions and allowances is crucial.

The market value of the property at the time of inheritance is used to determine the base value for CGT calculations. In this case, the market value is £300,000.

Additionally, you can use the annual CGT allowance to reduce the taxable amount. This allowance can be deducted from your total gains, thereby lowering the amount of CGT you owe.

Capital gains for those in the basic tax rate is 18% on residential property and 28% for those who are in the higher or additional tax rate band.

Reporting and Paying Tax

If you need to pay capital gains tax on an inherited property, you must report the gain to HMRC and pay the tax due. You can report the gain on your self-assessment tax return, which is usually due by 31 January following the end of the tax year.

For residential property sales, you must report the gain and pay the tax due within 60 days of the sale completion. You can use the HMRC capital gains calculator to work out how much capital gains tax you owe.

It’s crucial to pay the tax due on time to avoid penalties and interest. You can pay the tax online, by phone, or by post. If you are unable to pay the tax due, you should contact HMRC to discuss your options.

Is it Possible to be Exempt from Inheritance Tax?

After a lifetime of hard work and sacrifice from their deceased family member, many families loathe to hand over any more of their estate to the government than is necessary. There are a few circumstances that qualify you as exempt from inheritance tax in the UK. What are those circumstances?

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• Estate is Left Solely to Spouse/Partner

If an estate is left in its entirety to a spouse or partner, it is not subject to inheritance tax.

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• Tax-Free Inheritance is Below the Threshold

The threshold (or nil band) for an estate is £325,000. If the total of the estate is less than £325,000, you are exempt from inheritance tax.

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• Trust for Bereaved Minors

If a trust is set up for a bereaved minor (a minor who has lost a parent or stepparent), they will not be required to Inheritance tax as long as the assets are set aside strictly for the bereaved minor and they are fully entitled to those assets by the age of 18.

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• Higher Threshold Limit for Children and Grandchildren

If an estate is left to children or grandchildren, the threshold is raised to £500,000.

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• Charity

For those leaving parts of their estate to charity, there will be no inheritance tax levied against the total donated to any charities.

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Primary Residence Exemptions

If you inherit a property and make it your primary residence, you may be eligible for private residence relief. This relief can reduce or eliminate the capital gains tax liability when you sell the property.

To qualify for private residence relief, you must have lived in the property as your main home for at least some of the time you owned it. The relief is also available if you are unable to live in the property due to illness or disability.

You can also claim private residence relief if you sell a property that was previously your main home but is no longer your primary residence. However, you must have lived in the property as your main home for at least some of the time you owned it.

Are There Other Types of Taxable Income from the Inherited Property?

Not all inherited properties are used as a main residence for the deceased. Often, there are rental properties that are passed from one family member to another through a will. These homes or properties, whether they are in a trust or not, still abide by all applicable inheritance tax laws. Any income received by the deceased is property of the estate and must be tabulated in probate. An accurate probate valuation is crucial in determining the true value of inherited properties, especially when calculating capital losses for tax purposes.

If there is an inherited property that has rental income, the beneficiary will be required to file that income and pay the required taxes. Understanding the tax liabilities related to rental income from inherited property is essential to effectively manage tax responsibilities.

Minimising Tax Liability

There are several ways to minimise your tax liability when selling an inherited property. One way is to use your annual capital gains tax allowance, which is £12,300 for the 2020-2021 tax year. You can also deduct allowable expenses, such as solicitors’ fees and costs of improvements, from the gain.

Another way to minimise your tax liability is to consider gifting the property to a spouse or civil partner. Transfers between spouses or civil partners are exempt from capital gains tax.

You can also consider selling the property in stages, using multiple tax years to take advantage of your annual capital gains tax allowance. However, this can be complex and may require professional advice.

Should I Sell an Inherited Property?

This decision belongs to the person who has inherited a property. Regardless of the choice, if you have inherited a home and now have 2 homes, you are required by law to designate one of them as your main residence within 2 years. If you do not do so, the HMRC will decide for you based on the best available data they have. In scenarios where you sell the inherited property, you may need to pay CGT on the realized gains, especially if the property is not exempt under specific conditions such as sales involving charities.

If you choose to sell the home, be aware of the potential capital gains that you may owe. The tax-free allowance can significantly affect the calculation of your taxable gains, so it's important to understand how it applies to your situation. If you choose to rent, you will be obligated to report the rental income. If you choose to move into the home and use it as your main residence, you may still be required to pay inheritance tax on a portion of the value of the house (if you are not eligible for exemption).

If I Inherit Property, does it Affect my Tax Rate or my Income Tax?

Inheriting a home is not considered “income” therefore it does not affect your tax rate or your income tax. This may change if you decide to sell the home or if you choose to rent it out. Both options will produce “income” that may change your tax obligations.

Inheriting Property in the UK

If you are unsure or have questions about the inheritance process, ask one of our property accountants on 020 7419 6538 or fill in our contact us form. Knowing exactly what does and does not apply can be a somewhat complex process and it is always advisable to reach out if you feel like you need help. The sums of money owed in an inheritance can be large and you want to ensure your tax compliance.

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