Inherited Property and Capital Gains Tax: A Clear Guide
Inheriting property can be a difficult and emotional experience. Amidst the personal challenges, it’s also important to understand the tax implications to avoid unexpected financial burdens. A key question that often arises is whether you need to pay Capital Gains Tax (CGT) on inherited property.
The simple answer is no, not upon inheritance. CGT is not charged when you inherit an asset. However, it may become payable if you later decide to sell the property. This guide will walk you through how CGT works in this scenario and what you can do to manage your potential liability.
How Capital Gains Tax Applies to Inherited Property
When you inherit a property, it is valued at its market price on the date of the previous owner’s death. This is known as the “probate value” and becomes your “acquisition cost” for tax purposes.
Capital Gains Tax is then only charged on the increase in value from the date of inheritance to the date you sell the property.
Calculating Your Potential Gain
The calculation is straightforward:
Sale Price - Probate Value - Allowable Costs = Total Gain
Current CGT Rates and Allowances (2024/2025 Tax Year)
Once you have your “Total Gain,” you can apply the relevant tax rules:
- Annual Exemption: Every individual has a CGT Annual Exempt Amount, which is a tax-free allowance. For the 2024/2025 tax year, this is £3,000. You only pay tax on gains above this amount.
- Tax Rates: The rate of CGT you pay on residential property depends on your income tax band:
- Basic Rate Taxpayers: Pay 18% on the gain.
- Higher Rate Taxpayers: Pay 24% on the gain.
Example:
- You inherit a property valued at £300,000.
- You sell it two years later for £350,000.
- Your allowable costs (e.g., estate agent and legal fees) are £5,000.
- The gain is £350,000 - £300,000 - £5,000 = £45,000.
- Deducting your annual exemption: £45,000 - £3,000 = £42,000.
- If you are a higher-rate taxpayer, your CGT bill would be 24% of £42,000 = £10,080.
Key Reliefs and Considerations
Several factors can significantly reduce or even eliminate your CGT liability.
Main Residence Relief
If you decide to live in the inherited property as your main home, you will likely qualify for Private Residence Relief (PRR). This relief exempts the period you live in the property from CGT, plus the final nine months of ownership. If it has been your only or main residence throughout the time you’ve owned it, you may have no CGT to pay at all.
Allowable Costs
Don’t forget to deduct all allowable expenses from your gain. These include:
- Fees for buying and selling: Such as estate agent fees, auctioneer costs, and solicitor fees.
- Costs of improvement: Such as building an extension or a new kitchen. Note that this does not include routine maintenance (e.g., redecorating).
Joint Ownership
If you inherit a property with others (for example, with your siblings), the gain is split between you. Each owner can use their own annual CGT exemption, which can be a significant advantage.
Reporting and Paying CGT
For UK residential property, any CGT due must be reported and paid to HMRC within 60 days of the completion of the sale. This is a strict deadline, so it’s crucial to be prepared.