Do you pay Capital Gains Tax on inherited property?

In this article, we will explore some of the key aspects of Capital Gains Tax on inherited property in the UK (England and Wales).

Inheriting property from a late family member can be a bittersweet experience. It often comes with both emotional and financial implications. For beneficiaries of an estate receiving an interest in a property, understanding the details of capital gains tax (CGT) is essential to manage their tax liabilities and make informed decisions.

All beneficiaries should consider CGT very carefully and seek legal advice before taking any action.

Please note that CGT matters can be complex and for this reason, we are not able to answer general CGT enquiries by email or telephone. It is important that we receive your formal instruction and understand your particular circumstances before advising you. Therefore, you may wish to book an appointment with us, either by video call or in-person, to discuss your CGT position. Please call us on 01707 329 333 or email law@crane-staples.co.uk to book an appointment to discuss CGT and inherited property. We can also provide you with an initial fee estimate for this advice.

 

What is Capital Gains Tax?

Capital Gains Tax is a tax levied on the profit made from selling or disposing of an asset that has increased in value during ownership. The clue is the name. If you sell a qualifying asset for a gain (profit), you may need to pay CGT on the difference between what the asset was worth when you started to own it and what it was sold for. CGT is applicable to various assets. These include property, stocks and shares, and personal possessions. However, for the purpose of this article, we will focus on the CGT implications specifically related to inherited property.

How much Capital Gains Tax will I have to pay when selling an inherited property?

For further details on Capital Gains Tax, including calculation of CGT, CGT rates for individuals and trustees, please read our previous article here.

Capital Gains Tax when someone dies

When a person dies, there is no immediate CGT charge. Instead, there are special rules for when the beneficiaries of the deceased sell any chargeable inherited assets for a gain. The assets that the deceased owned are treated as being passed to beneficiaries at market value as at the date of death.  (This is sometimes referred to as the probate value).

Capital Gains Tax on Inherited Property

When someone dies, their estate will acquire the deceased’s assets at their probate value. This is because we pay inheritance tax on death in the UK, not CGT. Therefore, if the deceased’s property is transferred directly to a beneficiary, there will be no CGT payable.

However, if the beneficiary later decided to sell the property (and the property was not their main residence) for more than the probate value, they would then have to pay CGT on the gain. It is possible for the personal representatives to sell the property without transferring all of it to the beneficiaries. If they do this, the Estate has an annual exemption for the tax year of death and the following two tax years. In some circumstances, it is possible to utilise both the personal representatives’ CGT annual exemptions (see below) and those of the beneficiaries. To understand the calculation of CGT payable, see our article here.

Siblings inheriting parents’ property

It is often the case that there are multiple siblings inheriting their parents’ property after both parents have passed away. In such a scenario, the siblings might decide to sell the property. If so, they must consider if they need to pay CGT. If the property was sold for more than the probate value, they would need to pay CGT on the increase in value. However, they may be able to save CGT by utilising all of the yearly allowances. This means they could spread out the gains between themselves. On the flip side, if the property was sold for a loss, this loss can be offset from the beneficiaries’ own personal CGT liability (if any).

In some cases, the inherited property may be passed on to beneficiaries but sold without a gain. This means the beneficiary inherits the property at its market value at the time of inheritance. If the beneficiary sells the property later at the same market value, there will be no CGT payable. This is because there has been no gain.

If you are a UK resident, when you sell or dispose of the whole or part of a property in the UK and are liable to pay CGT, you must tell HMRC within 60 days of completion (sale date). Personal representatives (Executors) do not pay tax at the same time as submitting the online return. HMRC will contact the personal representatives with the amount due and payment instructions.

How can I reduce my Capital Gains Tax exposure on Inherited Property?

The UK tax system provides certain exemptions and allowances that can reduce or eliminate the CGT liability on inherited property:

1. Annual Exemption

Everyone has an annual CGT exemption threshold. As of August 2023, the annual exemption for the 2023/2024 tax year is £6,000 and £3,000 for trusts. This means that the first £6,000 of capital gains in a tax year are exempt from CGT.

2. Spouse Exemption

If a beneficiary chooses to share their share of an inherited property with their spouse or civil partner prior to sale (exchange of contracts), the transfer to the spouse will always be exempt from CGT. As a result, additional CGT annual exemptions can be used.

3. Principal Private Residence Relief

This relief may apply to a gain accruing to an individual on the disposal of an interest in a property that has been the individual’s only or main residence. This relief can reduce or eliminate CGT on the proportion of time the deceased owned the property and the period the beneficiary lived in it as their main residence.

4. Charity Exemption

Assets sold by or on behalf of a charity do not bear CGT. However, if you sold the asset to a charity, you would still need to pay CGT on any gains made. Personal representatives may therefore assign some or all of an interest in a property to a charity prior to sale (exchange of contracts). This is in order to prevent a charge of CGT arising for the estate.

5. Allowable losses

You can report losses on a chargeable asset to HMRC. This can reduce your total taxable gains in the same tax year. This loss is deducted from the gains you have made in the same tax year. If your total taxable gains are still greater than the tax-free allowance, you can deduct unused losses from previous tax years. If these unused losses reduce your gains to the tax-free allowance, you may carry forward the remaining losses for future years.

How long do I have to live in an inherited house to qualify for Principal Private Residence Relief?

As previously mentioned, the Principal Private Residence Relief will apply to a property that is your main residence. Consequently, this avoids any CGT upon sale.

To qualify for this relief, you must show that the property has been your main residence. This will be the case if:

1. you have always lived at the property throughout the duration of your ownership; and
2. you have not been absent from the property for a prolonged period of time.

The period of ownership begins on the date you first acquired the property and ends when you dispose of it. The final 9 months of your period of ownership will always qualify for the relief. This is regardless of how the property is used, so long as it has been your only or main residence at some point in time. For disabled persons or for people resident in a care home, this period is extended to 36 months.

If the property has not always been your only/main residence

If the property has not always been your only or main residence, you will need to split any gains made proportionally. When calculating the proportion of the gain eligible for the relief, you multiply the gain by a fraction equal to the periods of occupation (including the final 9 months of ownership).

If you own more than one property

If you own more than one property, you will need to nominate which property is your main residence. You must do this within 2 years of the date you first came to own both properties. In the absence of a nomination, your main residence will be determined on the facts of the matter.

In some instances, you may be unable to occupy the new property when you acquire it. For example, if you are unable to sell your old property, or you need to carry out refurbishments to the new one. You can treat the first 24 months of ownership as if the house had been your only or main residence in that period.

These calculations of CGT can evidently be quite complex. If you require any assistance with calculating CGT please contact our Wills, Trusts and Probate Team to arrange an appointment (this can be in-person or on a video call).

Seeking Professional Advice

Navigating the complexities of Capital Gains Tax on inherited property can be challenging. Tax rules and allowances may change over time. It is crucial for personal representatives and beneficiaries to seek professional advice from professionals. At Crane & Staples we can provide tailored guidance based on your specific circumstances. We can help to ensure compliance with tax regulations and maximise any available reliefs.

Conclusion

Inheriting property is a significant event, and understanding the implications of CGT is essential for beneficiaries in the UK. Whether the inherited property is a chargeable asset or a no-gain, no-loss transfer, being aware of the exemptions and allowances can help beneficiaries manage their tax liabilities more effectively.

To book an appointment to discuss estate planning or Capital Gains Tax, please contact our Wills, Trusts and Probate Team who would be happy to help