Capital Gains Tax on Inherited Property

Do you pay capital gains tax on inherited property in the UK?

No Capital Gains Tax(CGT) is due when you inherit property. CGT applies only if you later sell it for profit, from the date you inherited it. Main residence relief may apply.

Understanding Capital Gains Tax (CGT)

CGT is a tax on the profit (gain) you make when you sell or dispose of an asset that has increased in value. When you inherit a property and subsequently sell it, you may be liable for CGT.

Key Principles

• Taxable Gain: CGT is only payable on the profit made from the date of inheritance to the date of sale.
• Annual Exemption: Each individual has an annual CGT exemption, which reduces the taxable gain.
• Tax Rates: CGT rates vary depending on your income tax band and the type of asset.
• Reporting: You must report and pay CGT to HMRC within specific timeframes.

Inheritance and CGT: The Basics

When you inherit a property, the acquisition cost for CGT purposes is the market value of the property on the date of death. This is known as the “probate value.”

Probate Value

• The probate value is the property’s market value at the date of the deceased’s death.
• It is used as the base cost for calculating any future CGT liability.
• Accurate valuation is crucial, and professional valuations are recommended.

Calculating the Gain

To calculate the CGT liability, you need to:

1. Determine the probate value of the property.
2. Deduct any allowable expenses (e.g., estate agent fees, legal fees, and costs of improvements).
3. Subtract the probate value from the sale price to calculate the gain.
4. Deduct your annual CGT exemption from the gain.
5. Apply the appropriate CGT rate to the remaining gain.

Key Considerations

Main Residence Relief (Private Residence Relief - PRR)

• If you move into the inherited property and make it your main residence, you may be eligible for PRR.
• PRR can reduce or eliminate the CGT liability if you sell the property later.
• The extent of the relief depends on the period the property was your main residence.

Allowable Expenses

• Certain expenses can be deducted from the gain, reducing the CGT liability.
• Allowable expenses include:
  • Estate agent fees
  • Solicitors’ fees
  • Costs of improvements (not maintenance)
  • Stamp Duty Land Tax (SDLT) paid on the purchase (if applicable)

Joint Ownership

• If the property is inherited jointly, each owner is responsible for their share of the CGT.
• Each owner can use their annual CGT exemption.

Time Limits

• You must report and pay CGT within 60 days of the completion date if you are selling a UK residential property.
• For other assets, you must report CGT through your self-assessment tax return.

Practical Steps

1. Obtain a Professional Valuation: Get a professional valuation of the property at the date of death.
2. Keep Detailed Records: Maintain records of all expenses related to the property.
3. Determine Your Main Residence: If you intend to live in the property, establish it as your main residence.
4. Calculate the Gain: Calculate the potential CGT liability before selling the property.
5. Utilize Your Annual Exemption: Ensure you use your annual CGT exemption.
6. Report and Pay CGT: Report and pay any CGT due within the required timeframes.
7. Seek Professional Advice: Consult with a tax advisor or accountant for personalized advice.

Key Considerations and Tips

Timing of Sale

• Consider the timing of the sale to minimize CGT.
• Spreading sales over multiple tax years can utilize multiple annual exemptions.

Improvements vs. Maintenance

• Distinguish between improvements (which can be deducted) and maintenance (which cannot).
• Improvements add value to the property, while maintenance keeps it in its existing state.

Joint Ownership Planning

• If jointly owned, coordinate with other owners to manage CGT liabilities.

Record Keeping

• Maintain thorough records of all transactions, valuations, and expenses.

Professional Advice

• Consult with a tax advisor or accountant for personalized advice and planning.

By understanding the CGT implications of inherited property and taking appropriate steps, you can manage your tax liabilities effectively and maximize your financial benefits.

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