Do I have to pay Capital Gains Tax on inherited property?
:quality(80))
Explaining all things Capital Gains Tax on inheritance property, including whether you have to pay Capital Gains Tax on inherited property when selling…
Dealing with the loss of a loved one is an emotionally challenging time, and the added responsibility of managing an inherited property can add to the stress. Among the key concerns you might face are the implications of Inheritance Tax and Capital Gains Tax on inheritance property, especially if you’re considering selling it.
In this Capital Gains Tax on inherited property guide, we aim to demystify this complicated topic, all while answering questions such as whether you’re liable to pay Capital Gains Tax when selling an inherited property, how it differs from Inheritance Tax and what these taxes actually mean to you.
Additionally, we will provide insights into how much Capital Gains Tax (CGT) you might be expected to pay and offer strategies for efficiently selling an inherited property. We would also recommend that consulting a financial advisor can help clarify how Capital Gains Tax on inheritance affects your inherited assets.
If you’re looking to find an answer quickly, use the menu below to guide you:
What is Capital Gains Tax on Inheritance Property?
Capital Gains Tax is usually not a concern for your primary residence, as it’s usually exempt from this tax. However, the rules change when it comes to Capital Gains on inheritance property.
Since an inherited property is often not your primary residence, you’re likely to face CGT on inherited property when you decide to sell it after going through the probate period.
It’s important to recognise that not just inherited properties, but any property that isn’t your main home, like Buy to Let portfolios or holiday homes in England, could also be subject to CGT. This tax will vary depending on several factors, making it a tax that doesn’t adopt a ‘one size fits all’ approach.
The amount of CGT on inherited property you pay is influenced by:
The sale value of the asset: The final sale price of the property plays a role in determining the amount of CGT payable.
Type of asset: Different asset types attract varying CGT rates. Residential properties often incur higher Capital Gains Tax compared to commercial developments.
Duration of ownership: The length of time you’ve held the asset impacts CGT calculations, with potential implications for tax relief depending on the duration.
Your personal tax bracket: The rate of CGT on inherited property you’re subject to is also dictated by your overall tax bracket, with higher rate taxpayers paying more.
Importantly, the impact of Capital Gains Tax on inheritance properties can be significant, particularly if the property’s value has increased over time. This is why it's important to understand the different strategies to potentially avoid Capital Gains Tax on inherited property.
Do I have to pay Capital Gains Tax on inherited property sale?
Yes, in short, you will have to pay Capital Gains Tax on inherited property when it comes to selling.
This is because an inherited property won’t be your primary residence, and by the time you have got through probate, got the property on the open market and finally got a sale, the value of the property will have increased in value.
You can make deductions from the amount of Capital Gains Tax on an inherited property you will have to pay. For example:
Estate agent’s fees
Solicitor's fees
Advertising costs for finding a buyer
Costs of any improvement work (if you’ve added an extension for example. Maintenance costs, such as decorating, don’t count here)
Auctioneer's fees (if you sell through auction)
Costs of a surveyor
Exactly how much CGT on inherited property you will have to pay will depend upon the profit made, how much you earn and what deductions need to be made from the total gain. Beneficiaries should seek professional advice to understand their liability for Capital Gains Tax on inheritance.
How do you pay Capital Gains on Inherited property?
In order to pay Capital Gains on inherited property you will need to determine how much you owe, calculate the gain and deduct any allowances (we will cover this next).
If you reside in the UK, and you owe capital gains tax on inheritance property, you must report the gain to HMRC using the Self-Assessment tax return system. If you dispose of a residential property and make a capital gain on inherited property then you must report and pay the CGT within 60 days of the completion of the sale.
Paying by the deadline will ensure that you miss any penalties and interest.
If you’re looking to sell your inherited property and don’t know how much CGT to expect to pay, the next section will be of great use to you!
How much Capital Gains Tax will I have to pay on inherited property?
To accurately calculate the amount of Capital Gains Tax on inherited property you might owe, it’s essential to follow a structured approach. We’ve simplified this process into a series of clear, easy to follow steps below. By following these guidelines you can effectively calculate your potential Capital Gains Tax on inheritance property liability:
1. Calculate your total gain
First, you will need to work out your total gain or profit. This will be the value of the sold property, minus its original value and all costs involved.
For example
Sale price of the property: £200,000
Inherited value of the property: £100,000
Estate agent fees: £2,000
Solicitor’s fees: £2,000
Calculation: £200,000 - £100,000 - £2,000 - £2,000 = £96,000
Your total gain on the inherited property is £96,000.
2. Capital Gains Tax allowances
Annual Exempt Amount for 2024/25: £3,000
3. Calculate Taxable Gain
Taxable Gain: £96,000 (total gain) - £3,000 (Annual Exempt Amount) = £93,000
4. Calculate Total Amount of Capital Gains Tax payable
Assuming you have an annual income of £34,000 and using the basic rate tax bands for Capital Gains Tax:
Taxable Income:
£34,000 (your income) - £12,570 (personal allowance for 2024/25) = £21,430 taxable income.
As your taxable income is £21,430, this, when added to your taxable gain (£93,000), exceeds the basic rate band (£50,270). Therefore, part of your gain will be taxed at the higher rate.
Part taxed at basic rate: £50,270 - £21,430 = £28,840
Part taxed at higher rate £93,000 - £28,840 - £64,160
5. Calculate Capital Gains Tax
The CGT at Basic Rate (20% on “8,840): £28,840 * 20% = £3,768
The CGT at Higher Rate (40% on £64,160): £63,160 * 28% = £25,664
Total Capital Gains Tax: £5,768 + £25,664 = £31,432.
You can calculate Capital Gains Tax on inheritance property on the UK Government website.
Difference between inheritance tax and Capital Gains Tax on inherited property
When you inherit a property, it’s natural to wonder why Capital Gains Tax applies even after dealing with Inheritance Tax. Understanding the distinction between these two taxes is key to grasping the financial implications of inheriting estate assets.
Inheritance Tax is levied on the entire value of the deceased’s estate if it exceeds £325,000, at a rate of 40%. This tax encompasses all aspects of the estate, including property, savings, shares and other assets.
Inheritance Tax reflects the transfer of wealth from the deceased to the beneficiaries and is usually handled by the executor of the will. It’s important to pay this tax within 6 months of the person’s death to avoid interest charges on the overdue amount.
On the other hand, Capital Gains Tax on inherited property is a separate entity, Capital Gains Tax is not triggered simply by inheriting an asset; it comes into play only if you decide to sell the inherited property.
The critical factor here is the gain - the difference in the property’s value from the time of inheritance to the time of sale.
This means you’re not taxed on the entire sale value, but only on the profit made, if any. Given the tendency for property values to rise over time, it’s common to face a significant Capital Gains liability upon selling an inherited property, especially after it has been through probate and market valuation.
While inheritance tax is concerned with the initial transfer of the estate, Capital Gains Tax on inheritance focuses on the profit realised from the subsequent sale of an inherited property. Both taxes are integral to estate management but they serve different purposes and are triggered by different events.
Here is a table to breakdown the difference between CGT and IHT:
| Inheritance Tax (IHT) | Capital Gains Tax (CGT) | |
|---|---|---|
| What it Applies To | The entire value of the deceased's estate (including property, savings, shares, etc.) | The profit made from selling an inherited property. |
| Threshold | Taxable on estate values over £325,000. | No specific threshold; depends on the profit made upon selling the property. |
| Tax Rate | 40% on the value of the estate above the threshold. | Varies; typically 20%, 40% or 45% for residential property, depending on the taxpayer's income tax band. |
| When It's Paid | Within 6 months of the person's death. | Within 60 days of the sale completing. |
| Responsibility for Payment | Arranged and paid by the executor of the will before the estate is released. | Paid by the individual who inherits and then sells the property. |
| Interest on Late Payment | Interest charged if not paid within 6 months of the person’s death. | £300 or 5% of tax due, whichever is greater if the deadline missed by 6 months. |
| Basis of Tax | Based on the value of the estate at the time of death. | Based on the profit (difference between the sale price and the value at the time of inheritance). |
| Purpose of Tax | Levied as a transfer tax on the passing of assets from the deceased to their beneficiaries. | Levied on the gain realised from the increase in value of the property from the time of inheritance to sale. |
Do I pay CGT on a gifted property?
When you receive a property as a gift, it’s important to understand the potential Capital Gains Tax implications both at the time of receiving the gift and if you decide to sell the property later.
Initially, when you receive a property as a gift, you usually won’t incur any Capital Gains Tax liability. At this point, no sale or ‘disposal’ in the traditional sense has occurred, which is the usual trigger for CGT.
If you sell the gifted property, Capital Gains Tax may be applicable on any gains made. The gain is calculated as the difference between the property’s market value when it was gifted to you and the sale price you achieve. The gain represents the increase in the property’s value during your period of ownership.
For Capital Gains Tax purposes, the property’s value at the time of the gift becomes your base cost, or base value. It is essential to have an accurate valuation of the property at the time of the gift, as this will be used to calculate any potential capital gain when you sell it.
Receiving a property as a gift from family members such as parents or other relatives, doesn’t provide any exemption from Capital Gains Tax upon its eventual sale. The rules for calculating CGT are the same as for any gifted property.
If the donor (the person who gifted you with property) continues to use the property, such as living in it, the gift may be classified as a gift with reservation of benefit. This can have complicated implications, potentially affecting both CGT and Inheritance Tax.
For CGT, it might impact the availability of certain reliefs and for Inheritance Tax, it might mean the property is still considered part of the donor’s estate.
Do you have to pay Capital Gains Tax on a gifted property if it was gifted to avoid probate?
When a property is gifted to avoid probate, the property will still fall under the realm of usual property gifting rules. However, if you decide to sell the property then you will become liable to Capital Gains Tax on inheritance. The gain is calculated as the difference between the property’s value at the time it was gifted and its selling price.
Something to watch out for in this scenario however, is the inheritance tax considerations. If the person who gifted the property lives for seven years after making the fit, the property will fall outside their estate for inheritance tax purposes.
However, if the original owner passes away within seven years, then you may be liable to pay inheritance tax, which currently stands at 40%.
Do you pay CGT when gifted property to someone else?
If you choose to gift your property to someone else, this will be treated as a disposal for Capital Gains Tax purposes. Here, Capital Gains Tax is calculated as though you sold the property at its market value at the time of the gift. This may result in a Capital Gains Tax liability for you, even though you haven't received any sale proceeds.
If the gifted property has been your main home, you may qualify for Principal Private Residence Relief, which can significantly reduce or even eliminate the Gains Tax on the sale. Although this will depend on the duration the property was your main residence.
If there is CGT liability on the transfer or sale of the gifted property, you will need to file a Capital Gains Tax report and pay the tax within 60 days of the completion of the transaction.
If I inherited a house is it taxable?
In the United Kingdom, inheriting a house involves several tax considerations, primarily Inheritance Tax and Capital Gains Tax, but it’s important to understand that the tax implications vary based on different circumstances.
Inheritance Tax (IHT)
When you inherit a house, the primary tax concern is usually inheritance tax. This tax is levied on the estate (the total value of money and property) of someone who has died. Whether or not inheritance tax is due depends on the value of the estate and to whom the property is left.
If the total estate is valued below the IHT threshold, which is £325,000 as of April 2023, no Inheritance Tax is due. Anything above this threshold is potentially taxable. However, there are exemptions, such as property left to a spouse or civil partner, which usually doesn’t incur IHT.
Capital Gains Tax (CGT)
While there’s no Capital Gains Tax on inheritance to pay at the time you inherit the house, it may become relevant if you decide to sell the property later. As mentioned above, Capital Gains Tax is calculated based on the increase in the property’s value from the time of inheritance to the time of sale.
The value of the property at the time of the original owner’s death is used as the base cost for calculating any gain. If you sell the inherited property and it has increased in value, you may have to pay Capital Gains Tax on the profit, taking into account any exemptions or reliefs you’re eligible for, such as Principal Private Residence Relief if you’ve been living in the property.
Principal Private Residence Relief
If you move into the inherited property and it becomes your primary residence, you may qualify for Principal Private Residence Relief, which can significantly reduce or eliminate Capital Gains Tax when you sell the property.
PRR Relief applies to a property that has been your main or only residence. If you inherit a property and subsequently use it as your primary residence, you may become eligible for this relief.
For inherited properties, the base cost for Capital Gains Tax purposes is the market value of the property at the time of the original owner’s death. Any increase in value from that point until you sell the property is subject to Capital Gains Tax, subject to PPR Relief for the periods it was your main residence.
If you own more than one property, you can only nominate one property as your main residence at any one time for PPR Relief. If the inhibited property becomes your primary residence, you should formally nominate it as such with HMRC.
If you let out the property after living in it, you may also be eligible for Letting Relief, which can further reduce your Capital Gains Tax liability, although recent changes have limited the scope of this relief.
Renting out the inherited property
If you decide to rent out the inherited property, you may need to pay Income Tax on the rental income. The income you earn from renting out the property is subject to Income Tax, which must be declared to HM Revenue & Customs (HMRC).
You can deduct certain expenses from your rental income before calculating the tax due. These expenses include, but are not limited to, property maintenance and repairs, letting agent fees property insurance and mortgage interest.
The taxable rental income is calculated by taking the total rental income for the tax year and subtracting any allowable expenses, the remaining amount is what you pay tax on.
Additionally, when you sell the property, Capital Gains Tax might be due on any increase in value from the time you inherited it.
What would my Capital Gains Tax be on jointly owned inherited property?
Calculating Capital Gains Tax on jointly owned inherited property might depend on various factors, including the property’s value at the time of inheritance, its value at the time of sale, and any allowable directions or reliefs.
If the property is jointly owned with a spouse or civil partner, each of you can use your annual exemption, potentially doubling the amount of gain that can be exempted from Capital Gains Taxon jointly owned inherited property.
Here is a general outline of how to calculate Capital Gains Tax on jointly owned inherited property:
Calculate the base value: The base value for Capital Gains Tax is the market value of the property at the time of the original owner’s death, also known as the probate value.
Calculate the gain: When the property is sold, calculate the gain by subtracting the base value from the sale price.
Deduct allowable expenses: From this gain, you can deduct any costs of improving the property (not general maintenance), along with selling costs like estate agent and legal fees.
Determine each owner’s share: Since the property is jointly owned, divide the gain according to each owner’s share. For example, if you own 50% of the property, you would only calculate Capital Gains Tax on 50% of the gain.
Annual Exempt Amount: Each owner has an annual CGT exemption. For the 2024/25 tax year, this is £3,000 per person. Subtract this allowance from your share of the gain.
Apply the appropriate CGT rate: The rate of Capital Gains Tax you pay depends on your overall income. Basic rate taxpayers pay 20% on gains from residential property, while higher rate taxpayers pay 40% and additional rate taxpayers pay 45%. Your share of the gain will be added to your income to determine your tax rate.
Inheriting a house with siblings: example calculation
Suppose you and your sibling inherited a property valued at £300,000 at the time of the original owner’s death. You later sell it for £400,000, making a gain of £100,000.
After deducting allowable expenses (let’s assume £10,000) the net gain is £90,000.
Your share of the gain (at 50% ownership) is £45,000.
Less annual exempt amount (£3,000) is £42,000 taxable gain.
If you’re a basic rate taxpayer, Capital Gains Tax would be 20% of £42,000, which is £8,400.
Inheriting a house with partner: example calculation
Suppose you and your partner inherited a property valued at £250,000 at the time of the original owner’s death. You later sell it for £300,000, making a gain of £50,000.
After deducting allowable expenses (let’s assume £6,000) the net gain is £46,000.
Your share of the gain (at 50% ownership) is £23,000.
Less annual exempt amount (£3,000) is £19,000 taxable gain.
If you’re a basic rate taxpayer, Capital Gains Tax would be 20% of £42,000, which is £3,800.
Inherited a house and want to sell it? Here’s how!
When you’ve inherited a house and want to sell it, there are many different ways in which you can do so; with an estate agent; through auction and to a cash buyer.
Ideally, when selling an inherited property you will want to get the fastest sale possible, to try to limit the increase in the property’s value to reduce the amount of CGT on inherited property you will have to pay.
Should you use an estate agent for inherited property?
The first method you may think of when it comes to selling a property is with an estate agent on the open market. You will need to speak to a few different estate agents and explain that the property is inherited to see whose services will be more in line with what you need.
Once you’ve chosen your estate agent, they will value the property for you, get photos and a floorplan done and then put it onto the open market. From then, you will have to host viewings until you find yourself a buyer.
Whilst selling your house on the open market might be the most ‘traditional’ way of selling, this doesn’t necessarily mean it’s the best.
For example, estate agents tend to overvalue properties quite significantly so whilst you may initially look like you’re making a larger profit, you’re actually just meaning you will have to pay a larger amount of Capital Gains Tax on inheritance property.
Also, selling on the open market with an estate agent isn’t a quick sale and could lead to your property being on the market for months, sometimes even over a year, meaning there’s a higher chance the property will increase in value, meaning more profit and more CGT on inherited property.
As a result of this, selling through the open market may not be the best way to sell and minimise the Capital Gains Tax on inherited property.
Should you use a property auction for inherited property?
Another option when it comes to selling inherited property is selling through auction. Auction may be better suited than selling through the open market as buyers tend to look to pick properties up at a discount of the market value, meaning you may make less of a profit and will therefore have less inherited property CGT to pay.
The buyers at auction will all have their finances in place and will be ready to exchange contracts and put down a deposit when the hammer comes down on a deal. After auction, the buyer then has 20 to 28 days to complete the sale, therefore meaning it should be quicker than on the open market.
However, at auction there are no guarantees that your property will sell as the reserve price you set may end up not being met. You will also have to hold several open days for potential buyers to inspect the property, which may be difficult for you with the house acting as a reminder of the person who has passed.
Also, even though auction may be a faster method of sale compared to the open market, it’s still not the fastest method, with you potentially having to wait months before your property is approved for auction and then you will have to wait for a slot to become available.
You will also have to pay marketing costs, auctioneer’s commission fee, room hire and legal fees, meaning you could end up paying for these out of your own pocket.
Should you use a cash buyer for inherited property?
The final option for selling your property is to sell to a cash house buyer.
A cash buyer doesn’t require any kind of external funding from a lender, meaning they can buy fast, and they look to pick properties up at a discount, meaning you may make less profit and therefore have less CGT on inherited property to pay.
Also, selling to a cash house buyer, whether it’s an independent investor or a company, like ourselves, there will be less paperwork involved – something we’re sure you’re pleased to hear after going through probate.
In fact, if you sell to us as your cash buyer, we will handle the whole process and all the paperwork for you from start to finish, leaving you only having to give us a signature.
On top of this, we only require one quick viewing of your property, to check our cash offer is accurate, and we can buy the property in a fast timescale of your choice – anything to make a difficult process easier for you.
As a result of our fast-purchasing times, your property won’t have time to increase in value which would leave you with large amounts of Capital Gains Tax on inheritance to pay.
There’s no need to worry about having any fees to pay when selling to us, as we will cover them all for you, including the legal ones! Yes, that does mean you get our full offer in cash in your bank!
We’re also members of The Property Ombudsman and the National Association of Property Buyers and we’re rated ‘excellent’ on Trustpilot with over 1,000 reviews, showing we’re a cash buyer you can trust.
To add to this, we also have over 50 years of combined experience, so you could say we’re quite the experts on Capital Gains Tax on inherited property.
We know what it’s like to sell a property and how stressful it can be, without the added stress of probate and losing a loved one, so we will always be happy to listen to your worries and reassure you every step of the way.
Give us a call or fill in our online form to receive a no-obligation cash offer for us to buy your property as soon as possible to help avoid Capital Gains Tax on inherited property.
:quality(50))