Will I have to pay Capital Gains Tax on an inherited property?

Capital Gains Tax (CGT) applies to profits made when selling an inherited property in the UK. If you sell the property for more than its value at the time of inheritance, you may owe CGT on the profit. Understanding the rules surrounding capital gains tax on inherited property is crucial, as they can be complex.

To avoid capital gains tax on inherited property in the UK, consider selling quickly or living in the property as your main residence, which may qualify for relief. It’s also essential to keep track of allowable deductions that can reduce your taxable gain.

This blog will guide you through how CGT on inherited property works, how much you might owe, and effective strategies to minimise your tax liability.

What is capital gains tax?

Capital gains tax (CGT) is a tax on the profit made from selling or disposing of an asset that has increased in value. This tax applies when you sell assets such as property, stocks, or personal possessions. If you inherit a property and later sell it for more than its value at the time of inheritance, you may need to pay CGT on the profit.

For those dealing with capital gains tax on inherited property, it’s essential to know that CGT is calculated based on the difference between the sale price and the property’s value when inherited. Understanding these rules can help you manage your tax liabilities effectively and explore potential reliefs available to reduce your CGT bill.

Selling an Inherited Property and Capital Gains Tax

When you inherit property or valuable items, they become yours without immediate Capital Gains Tax (CGT) implications. You won’t pay CGT when you inherit the asset, but if you sell or dispose of it later, you may owe tax on any profit or gain made at that time.

If you are selling an inherited property, it’s important to understand that CGT applies only when you sell the asset for more than its value at the time of inheritance. This means that the gain is calculated based on the difference between the sale price and the value when you inherited it.

In cases where you jointly own an inherited property, CGT will only apply to your share of the gain when you dispose of it. Being aware of these rules can help you manage your tax obligations effectively when dealing with inherited assets.

What assets do you pay Capital Gains Tax on?

You pay CGT on the gain when you sell (or ‘dispose of’):

• most personal possessions worth £6,000 or more, apart from your car
• property that’s not your main home
• your main home if you’ve let it out, used it for business or it’s very large
• any shares that are not in an ISA or PEP
• business assets

These are known as ‘chargeable assets’.

Personal possessions that you may pay CGT on will include things like:

• jewellery
• paintings
• antiques
• coins and stamps
• sets of things, e.g. matching vases or sets of cutlery.

If you sell or give away cryptoassets (like cryptocurrency or bitcoin) you should check if you have to pay Capital Gains Tax.

Depending on the asset, you may be able to reduce any tax you pay by claiming a relief.

Is there Capital Gains Tax to pay on the estate?

The estate of the deceased does not pay capital gains tax (CGT) on property or assets before or at the time of death. However, if the property is sold during probate and its value has increased since the person died, CGT may apply. The tax is calculated based on the increase in value from the date of death to the sale date.

When selling an inherited property, beneficiaries must consider CGT on any profit made. It’s essential to determine the property’s value at inheritance and deduct allowable costs to calculate the taxable gain accurately. Understanding CGT on inherited property can help manage potential tax liabilities effectively.

How Does Capital Gains Tax Apply to Inherited Property?

Capital gains tax (CGT) applies to inherited property when it is sold for a profit. While you won’t pay CGT upon inheriting a property, any gain made from its sale after the owner’s death may be taxable. The key point is that CGT is calculated based on the increase in value from the date of death to the date of sale.

When you sell an inherited property, the following factors come into play regarding CGT:

• Valuation at Inheritance: The property’s value is assessed at the time of the original owner’s death. This figure is crucial as it establishes your baseline for calculating any gains.
• Selling Price: The amount you sell the property for will determine your profit. The gain is calculated by subtracting the value at inheritance from the selling price.
• Allowable Deductions: You can deduct certain costs from your gain, such as estate agent fees, legal costs, and improvements made to the property. However, routine maintenance costs cannot be deducted.
• Tax Rates: The rate of CGT depends on your income tax bracket. Basic rate taxpayers pay 18%, while higher rate taxpayers face a 28% charge on gains from residential properties.
• Annual Exemption: Each individual has an annual tax-free allowance (£12,300 for the 2020-2021 tax year), which means you only pay CGT on gains exceeding this threshold.

It’s important to note that if you decide to live in the inherited property as your main residence, you may qualify for Principal Private Residence Relief (PRR), which can exempt you from CGT when you eventually sell it.

Inheriting a property does not trigger CGT, selling it may lead to tax liabilities based on any profit made since the previous owner’s death. Being aware of these details can help manage potential tax implications effectively when dealing with capital gains tax on inherited property.

But I already paid tax!

When you inherit property, you may wonder why you have to pay Capital gains tax (CGT) after already paying inheritance tax. Inheritance tax, as high as 40%, applies only to estates valued over £325,000.

This tax is paid before assets are distributed, while CGT is assessed when you sell the inherited property for a profit.

CGT on inherited property comes into play when you decide to sell. If the property’s value has increased since you inherited it, you will owe CGT on the profit made from the sale. For instance, if you inherit a property valued at £200,000 and sell it later for £300,000, CGT will apply to the £100,000 gain.

Understanding CGT on inherited property is crucial for effective financial planning, especially when selling an inherited property.

How Capital Gains Tax works during probate

Probate refers to the legal and financial processes that manage the assets of a deceased person, including property, money, and possessions. This process involves validating the will (if one exists) and confirming who is authorised to handle the estate.

What is Probate?

1. Executor or Administrator: The individual responsible for managing probate is called the Executor if there is a will, or the Administrator if there isn’t.
2. Grant of Probate: Before claiming, transferring, or selling any assets, the Executor or next of kin must apply for a grant of probate.

Responsibilities of the Executor/Administrator

The Executor or Administrator manages all legal, tax, and administrative tasks associated with the estate. A key duty includes calculating and paying any taxes due from the estate, such as Inheritance Tax and Capital Gains Tax (CGT).

Capital Gains Tax on Inherited Property

When selling an inherited property, beneficiaries may be liable for CGT if the property has appreciated in value since inheritance. The tax applies to any gain made when selling the property:

1. Selling an Inherited Property: If you sell the inherited property for more than its value at the time of inheritance, CGT is payable on the profit.
2. CGT Rates: Basic-rate taxpayers pay 18%, while higher-rate taxpayers pay 28% on residential properties.

Key Considerations

1. Probate Value: Beneficiaries inherit assets at their probate value. If sold later at a higher price, CGT will apply to the increase in value.
2. Allowable Deductions: Costs incurred during the sale, such as legal fees and renovations, can be deducted from the total gain to reduce CGT liability.

Understanding capital gains tax on inherited property is crucial for beneficiaries. By being aware of potential tax liabilities and allowable deductions, individuals can effectively manage their financial responsibilities when dealing with inherited assets.

Who needs to pay the Capital Gains Tax?

During the probate process, the responsibility for paying Capital Gains Tax (CGT) falls primarily on the estate. If the estate sells an asset and incurs a gain, the executor will pay the CGT before distributing any remaining funds to the beneficiaries. This means that beneficiaries are not personally liable for CGT on gains realised by the estate.

However, once an asset is transferred to a beneficiary, it becomes their property. If they later sell this inherited property for a profit, they may be liable for CGT on that gain. Here’s what you need to know:

• Executor’s Responsibility: The executor manages all tax obligations during probate, including CGT.
• Beneficiary’s Liability: If you inherit property and sell it for more than its value at inheritance, you must pay CGT on the profit.
• Capital Gains Tax on Inherited Property: This tax applies only to gains made after the property is inherited.

Beneficiaries must be aware of these tax implications to avoid unexpected liabilities when selling inherited assets.

Deductions for Capital Gains Tax

When you sell the property, you can deduct certain expenses from the gain/profit youve made from the sale to reduce your CGT liability. For example, allowable deductions are:

• Estate agents fees
• Solicitor fees
• Advertising costs for finding a buyer
• Costs of any improvement work (if you’ve added an extension for example. Maintenance costs, such as decorating, don’t count here)
• Auctioneers fees (if you sell through auction)
• Costs of a surveyor

How much is Capital Gains Tax on a property?

How much CGT you may need to pay can be complex as there are factors that will affect the amount of tax you pay.

You pay a different rate of tax on gains from residential property than you do on other assets.

You only have to pay CGT on your overall gains above your Capital Gains Tax allowance (tax-free allowance called the Annual Exempt Amount). The Capital Gains tax-free allowance is £3,000 (or £1,500 for trusts). Any gain made above the allowance will be a taxable gain.

If you pay higher rate Income Tax

If you’re a higher or additional rate taxpayer you’ll pay:

• 28% on your gains from residential property
• 20% on your gains from other chargeable assets

If you pay basic rate Income Tax

If you’re a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets.

So, your CGT on inherited property bill will be affected by the following:

• The value of the asset being sold.
• The type of asset.
• How long you’ve owned the asset.
• Your personal tax situation (higher or lower rate tax payers will pay different amounts).

How much Capital Gains Tax will I have to pay?

When selling an inherited property, you may need to pay Capital Gains Tax (CGT) on any profit made from the sale. Understanding how much CGT you will owe involves a few straightforward steps.

Step 1: Calculate Your Total Gain

To determine your total gain, subtract the original value of the property at the time you inherited it from the selling price. Additionally, you can deduct any costs associated with selling the property, such as:

• Estate agent fees
• Solicitor fees
• Costs for improvements made to the property

For example, if you sold the inherited property for £300,000 and it was valued at £200,000 when you inherited it, along with £4,000 in selling costs, your total gain would be £96,000.

Step 2: Apply CGT Allowances

Each tax year, individuals are entitled to an Annual Exempt Amount. For the 2023/2024 tax year, this is £6,000. If you haven’t used this allowance yet, you can subtract it from your total gain. Continuing with our example, if your total gain is £96,000 and you apply the Annual Exempt Amount of £6,000, your taxable gain would be £90,000.

Step 3: Determine Your CGT Rate

The amount of CGT payable depends on your income tax band:

• Basic-rate taxpayers pay 18% on gains.
• Higher-rate taxpayers pay 28% on gains.

To find out how much of your gain falls into each band, consider your total taxable income for the year. If your income plus your taxable gain exceeds certain thresholds (£12,570 for personal allowance and £50,270 for basic rate), you may pay different rates on different portions of your gain.

Important Points

• Reporting CGT: You must report and pay any CGT due to HMRC within 60 days of selling the property.
• No CGT on Main Residence: If the inherited property becomes your main residence before selling it, you may qualify for Private Residence Relief and avoid CGT.
• Gifting to Spouse: Transferring an inherited property to a spouse or civil partner before selling can allow both parties to use their Annual Exempt Amounts.

By following these steps and considering your specific circumstances, you can effectively manage your Capital Gains Tax obligations when dealing with inherited property.

What is the CGT payment deadline?

When it comes to Capital Gains Tax (CGT) on inherited property, timely reporting and payment are crucial. If you sell a residential property and make a profit, you must report and pay any CGT owed to HMRC within 60 days of the sale completion date. This rule applies to properties sold after 27 October 2021.

For properties sold before this date, the deadline was 30 days. Failing to meet these deadlines can result in penalties, so it’s important to keep track of your timelines. If you’re unsure about your CGT obligations or need assistance with the process, consider consulting a tax professional to ensure compliance and avoid unnecessary costs.

Do I have to pay CGT if I move into an inherited property ?

If you inherit a property and decide to live in that property as your main residence, you won’t need to pay CGT if and when you choose to sell that property as you will be entitled to “private residence relief”.

How can I avoid capital gains tax on inherited property?

To avoid Capital Gains Tax (CGT) on inherited property, consider these strategies:

1. Sell Immediately: If you sell the inherited property for its current market value right after inheriting it, there will be no increase in value, meaning no CGT to pay.
2. Use Your Annual Exempt Amount: If your gain from selling the property is £3,000 or less, you can utilise your annual exempt amount to avoid CGT, provided you have no other gains in that tax year.
3. Principal Private Residence Relief: If you move into the inherited property and make it your main home, you can claim Private Residence Relief when you sell it, which can eliminate CGT on any gain.
4. Gifting to a Spouse: Transferring the property to your spouse or civil partner before selling can also help avoid CGT since transfers between spouses are exempt.

By employing these methods, you can effectively manage and potentially eliminate capital gains tax on inherited property.

Summary

Inheriting a property can be overwhelming, especially when considering the financial implications. If you decide to sell the inherited property, you may be liable for Capital Gains Tax (CGT) on any profit made. This tax applies to the increase in value since you inherited the property.

If you’re selling an inherited property, it’s crucial to understand your tax obligations. Our team at dns accountants can assist in calculating CGT and advising on your overall tax liabilities.

So, what taxes do you pay on an inherited property? For expert guidance on CGT and other related taxes, contact our specialist tax team at dns accountants today. Let us help you navigate the complexities of capital gains tax on inherited property efficiently.

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