Do You Pay Capital Gains Tax on Inherited Property?
When someone passes away and leaves property to you, it’s wise to consider the possible tax implications. In the UK, there are rules surrounding Capital gains Tax on inherited property, which largely relate to whether you decide to keep any inherited property or sell it. Here is a breakdown on how it all works:
Understanding Capital Gains Tax (CGT)
Capital Gains Tax is a tax on the profit made from selling an asset that has increased in value since you acquired it. When it comes to inherited property, however, the rules are a bit different from those for property which is purchased outright.
Do You Owe CGT Immediately After Inheriting Property, What About Inheritance Tax?
The good news is that you don’t pay Capital Gains Tax just for inheriting a property. Should the property be valued above a certain threshold, it may generate an inheritance tax (IHT) liability, however CGT would only apply should you later choose to sell the property.
How Capital Gains Tax Applies to Inherited Property
The property’s value is assessed at the time of the original owner’s death, which becomes the “probate value” or the property’s base value. This value is important because, if you later decide to sell the property, CGT will be calculated based on the difference between the probate value and the sale price.
Let’s say you inherit a property worth £500,000 at the time of the deceased’s death (the probate value). If you sell it later for £550,000, the taxable gain would be the difference, or £50,000. It’s important to remember that you can subtract any allowable expenses associated with selling the property, like estate agent fees or legal costs, which can reduce your capital gains liability.
Keeping the Property vs. Selling
If You Decide to Sell: Selling the property triggers a CGT event. If the property has appreciated in value since you inherited it, CGT will apply to the gain. In the 2024/25 tax year, the CGT rate for residential property is 18% for basic rate taxpayers and 28% for higher or additional rate taxpayers. You’ll also have a personal CGT allowance, currently £6,000, which can help reduce the taxable amount.
If You Keep the Property: Simply holding onto the property does not trigger CGT, and no capital gains are due unless you decide to sell. However, if the property continues to appreciate, the eventual capital gains could be higher when you do sell.
If You Live in the Inherited Property: Moving into an inherited property can provide some CGT relief if you later sell. Principal Private Residence Relief (PPR) may apply, reducing or eliminating CGT if the property was your main residence for a period. However, if you rent it out or use it as a second home, PPR would not apply to those periods.
Ways to Reduce Capital Gains Tax on Inherited Property
Use Your CGT Allowance: The annual CGT allowance (£6,000 for the 2024/25 tax year) can reduce the taxable gain. If you’re married or in a civil partnership, both partners can use their allowances.
Consider Principal Private Residence Relief: If you live in the inherited property, you may be eligible for PPR, which can substantially reduce or eliminate your CGT liability when you sell.
Sell in Stages: For properties split into separate units, selling portions over multiple tax years might allow you to use multiple CGT allowances, reducing the taxable gain each year.
Final Thoughts
Navigating capital gains tax on inherited property can be complex, and tax implications vary depending on your personal circumstances and how you choose to manage the property.
If you’re unsure about your tax obligations or how to minimise CGT, consulting a tax advisor or financial planner with experience in inheritance matters can be very helpful.
Remember, the rules surrounding capital gains tax on inherited property are designed to apply only when a financial gain is realised through a sale. Until then, you have flexibility in deciding whether to keep, sell, or move into the property to make the most of your inheritance. If you are interested in discussing Level's Estate Expense and Inheritance Tax lending products, which can help to pay for any Inheritance Tax Liabilities, please use make an enquiry using the link below: