Inheriting a property can provide valuable financial security, but many people are surprised to learn that a future sale may create a Capital Gains Tax (CGT) liability.
The good news is that you do not usually pay CGT simply because you inherit a property. However, if the property’s value increases between the date of inheritance and the date you sell it, some of that increase in value may be subject to tax.
Understanding the rules before you sell can help you plan ahead and ensure that you only pay the tax that is genuinely due.
How does Capital Gains Tax apply to inherited property?
CGT is charged on the profit, or “gain”, made when you sell or otherwise dispose of an asset that has increased in value.
For inherited property, the starting value is normally the market value used for probate purposes at the date of death. This means you are not taxed on any increase in value that occurred during the deceased person’s ownership.
For example:
- Probate value: £400,000
- Sale proceeds: £475,000
- Initial gain: £75,000
The taxable gain is then adjusted for any allowable deductions and reliefs before calculating the CGT payable.
What costs can be deducted?
Many people overlook costs that can reduce their taxable gain.
Allowable deductions may include:
- Estate agent fees.
- Solicitor and conveyancing costs.
- Stamp Duty Land Tax incurred when acquiring additional ownership interests.
- Capital improvements that enhance the property’s value, such as extensions, loft conversions or significant renovations.
Keeping invoices and supporting documentation is essential, as these costs can significantly reduce the gain subject to tax.
When is Capital Gains Tax payable?
A CGT liability will usually arise when the property is sold, gifted or otherwise disposed of.
If tax is payable on the sale of a UK residential property, the gain must generally be reported to HMRC and the tax paid within 60 days of completion.
Missing the reporting deadline can result in interest and penalties, so it is important to consider the tax position well before contracts are exchanged.
Can the Capital Gains Tax bill be reduced?
Depending on your circumstances, several reliefs and allowances may be available.
Private Residence Relief: If you move into the inherited property and it becomes your main residence, you may qualify for Private Residence Relief. This could exempt some, or potentially all, of the gain from CGT.
The availability of relief will depend on your individual circumstances and the period for which the property was your main home.
Annual CGT Exemption: Every individual benefits from an annual Capital Gains Tax exemption which can reduce the amount of gain subject to tax.
How can we help?
Just because a property is inherited, it does not always mean that CGT is automatically payable.
Our team can provide support throughout the process, from probate valuations, Inheritance Tax matters and estate administration through to Capital Gains Tax calculations, HMRC reporting requirements and tax planning prior to a property sale.
By seeking advice early, you can gain certainty over your tax position, avoid unexpected liabilities and ensure that all available reliefs and deductions are claimed.
Get in touch with our team for support with the Capital Gains Tax implications when selling an inherited home.
