When you inherit a property, understanding your tax responsibilities is crucial, particularly regarding Capital Gains Tax (CGT). While inheritance itself doesn't usually trigger an immediate tax bill, selling the property later can result in CGT liabilities. This guide explains when you might have to pay CGT on inherited property and how to calculate it.
Capital Gains Tax is a tax on the profit made when you sell or dispose of an asset that has increased in value. It is calculated on the gain, not the total sale value. For inherited property, CGT may come into play if the property is sold for more than its probate value (the value assigned at the time of the deceased's death).
No, inheriting property itself does not trigger a CGT bill. Instead, the property's value is established during probate, which is referred to as the "probate value." This value becomes the baseline for calculating any potential gains if the property is sold later.
For example, if a property is valued at £300,000 during probate and you sell it for £350,000, you would only pay CGT on the £50,000 gain, not the entire sale price.
CGT becomes due if:
1. You sell the inherited property, and its value has increased since probate.
2. You gift the property to someone other than a spouse or civil partner.
1. Selling the Property During Probate
If the executor sells the property during the probate process and its value has increased since the deceased's death, the estate must pay CGT on the profit. However, this is rare, as most assets are distributed to beneficiaries before being sold.
2. Selling the Property After Inheritance
If you, as the beneficiary, sell the property after inheriting it, CGT will apply to the gain made from the probate value to the sale price.
3. Gifting the Property
Gifting the property (other than to your spouse or civil partner) is treated as a disposal for CGT purposes. The "gain" is calculated based on the property's probate value and its market value at the time of the gift.
To calculate CGT, follow these steps:
1. Determine the Gain
Subtract the probate value of the property from the sale price.
For example:
Probate value: £300,000
Sale price: £350,000
Gain: £50,000
2. Apply Allowances
As of December 2024, individuals have an annual CGT allowance of £3,000. If you haven't used this allowance on other gains during the tax year, you can deduct it from the total gain.
Gain: £50,000
Less allowance: £3,000
Taxable gain: £47,000
3. Apply the Tax Rate
The rate of CGT depends on your income tax bracket:
Basic-rate taxpayers: 18% for residential property
Higher and additional-rate taxpayers: 28% for residential property
Example: If you're a higher-rate taxpayer, the CGT on a £47,000 taxable gain would be:
£47,000 x 28% = £13,160.
If the property is sold for less than its probate value, this results in a capital loss rather than a gain.
Capital losses can be a valuable tool in reducing your overall tax liability, as they can offset gains from other disposals of assets within the same tax year. For instance, if you sell an inherited property at a £20,000 loss but make a £25,000 gain from selling shares, the loss from the property can reduce your taxable gain to £5,000.
If you don't have other gains to offset in the same tax year, the capital loss can be carried forward indefinitely to offset gains in future years. However, it's important to formally register the loss with HMRC to ensure it can be used later. This is typically done when completing your Self-Assessment tax return for the year in which the loss occurred.
Additionally, when multiple beneficiaries inherit a property and share the proceeds of a sale, each beneficiary can report their proportion of the loss to HMRC. This can be particularly useful for tax planning, as each person may be able to use their share of the loss to reduce their individual CGT liabilities.
It's worth noting that losses on an inherited property will only apply if the sale price was below the probate value. If there is any question about the accuracy of the probate valuation, this could lead to complications later on.
For example, if the property valuation was overestimated at the time of the deceased's death - it may be worth revisiting the valuation process. HMRC allows for adjustments to valuations in certain circumstances, which could potentially minimise reported losses and ensure fair taxation.
Finally, while capital losses can provide a financial advantage in reducing tax liabilities, they are often an indicator of wider financial considerations, such as market conditions or the costs of maintaining and selling the property.
For example, if the property was sold quickly at a loss to avoid prolonged maintenance costs or debts attached to the estate, the executor or beneficiaries should weigh these factors carefully when deciding on the timing and method of sale.
When selling residential property that incurs CGT, the following steps are necessary:
- Report the Gain to HMRC
You must report and pay any CGT on residential property within 60 days of the sale completion. This deadline applies to sales made after April 2020. Reporting can be done via the online UK Property Account on the HMRC website.
- File a Self-Assessment Tax Return
You'll also need to report the gain in your annual Self-Assessment tax return, even if you've already paid the CGT.
If you inherit a property and it becomes your main residence, you may qualify for Private Residence Relief (PRR) when selling it. This relief can reduce or eliminate CGT if the property was your primary home for all or part of the ownership period.
1. Multiple Beneficiaries
If the property is left to multiple beneficiaries, it is advised to appropriate the property from the estate to the beneficiaries so that, each is treated as owning a share. Any gains from selling the property are then divided proportionally, and each individual calculates CGT based on their share and is responsible to declare to HMRC for their respective gain.
2. Inheritance Tax (IHT) and CGT
Inheritance Tax is separate from CGT. IHT is typically paid by the estate before assets are distributed, but it does not reduce your CGT liability when you sell inherited property.
3. Property Held in Trust
If the property is placed in a trust for beneficiaries, the trust may have to pay CGT when the property is sold. The specific rules depend on the type of trust.
Here are some strategies to reduce or defer CGT liability:
- Time the Sale: Use multiple tax years to take advantage of annual CGT allowances.
- Gift to Spouse/Civil Partner: Transfers between spouses or civil partners are CGT-exempt, potentially reducing tax liability.
- Private Residence Relief: Live in the property as your main home before selling.
- Use Losses: Offset gains with capital losses from other disposals.
While inheriting property is rarely a taxable event, selling it or gifting it later can trigger CGT. Understanding how this tax works, knowing the probate value, and applying allowances can help you manage your liabilities. If you're unsure about your situation, seeking advice from a probate solicitor or tax adviser can ensure you comply with the rules while minimising your tax burden.
At Premier Solicitors, we understand that handling Capital Gains Tax and Probate can be overwhelming. Our experienced legal team is here to provide clear, professional, and affordable advice tailored to your needs.
To discuss your queries or concerns, call us today on 01234 358 080 or visit our contact page to send an enquiry. Let us help you take the stress out of managing your legal affairs.
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