Do I have to pay Capital Gains Tax on inherited property?

Explaining all things Capital Gains Tax on inheritance property, including whether you have to pay Capital Gains Tax on inherited property when selling…

Dealing with the loss of a loved one is an emotionally challenging time, and the added responsibility of managing an inherited property can add to the stress. Among the key concerns you might face are the implications of Inheritance Tax and Capital Gains Tax on inheritance property, especially if you’re considering selling it.

In this Capital Gains Tax on inherited property guide, we aim to demystify this complicated topic, all while answering questions such as whether you’re liable to pay Capital Gains Tax when selling an inherited property, how it differs from Inheritance Tax and what these taxes actually mean to you.

Additionally, we will provide insights into how much Capital Gains Tax (CGT) you might be expected to pay and offer strategies for efficiently selling an inherited property. We would also recommend that consulting a financial advisor can help clarify how Capital Gains Tax on inheritance affects your inherited assets. 

If you’re looking to find an answer quickly, use the menu below to guide you:

What is Capital Gains Tax on Inheritance Property?

Capital Gains Tax is usually not a concern for your primary residence, as it’s usually exempt from this tax. However, the rules change when it comes to Capital Gains on inheritance property. 

Since an inherited property is often not your primary residence, you’re likely to face CGT on inherited property when you decide to sell it after going through the probate period. 

It’s important to recognise that not just inherited properties, but any property that isn’t your main home, like Buy to Let portfolios or holiday homes in England, could also be subject to CGT. This tax will vary depending on several factors, making it a tax that doesn’t adopt a ‘one size fits all’ approach. 

The amount of CGT on inherited property you pay is influenced by:

• The sale value of the asset: The final sale price of the property plays a role in determining the amount of CGT payable.

• Type of asset: Different asset types attract varying CGT rates. Residential properties often incur higher Capital Gains Tax compared to commercial developments. 

• Duration of ownership: The length of time you’ve held the asset impacts CGT calculations, with potential implications for tax relief depending on the duration.

• Your personal tax bracket: The rate of CGT on inherited property you’re subject to is also dictated by your overall tax bracket, with higher rate taxpayers paying more.

Importantly, the impact of Capital Gains Tax on inheritance properties can be significant, particularly if the property’s value has increased over time. This is why it's important to understand the different strategies to potentially avoid Capital Gains Tax on inherited property.  

Do I have to pay Capital Gains Tax on inherited property sale?

Yes, in short, you will have to pay Capital Gains Tax on inherited property when it comes to selling.

This is because an inherited property won’t be your primary residence, and by the time you have got through probate, got the property on the open market and finally got a sale, the value of the property will have increased in value.

You can make deductions from the amount of Capital Gains Tax on an inherited property you will have to pay. For example:

• Estate agent’s fees

• Solicitor's 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)

• Auctioneer's fees (if you sell through auction)

• Costs of a surveyor

Exactly how much CGT on inherited property you will have to pay will depend upon the profit made, how much you earn and what deductions need to be made from the total gain. Beneficiaries should seek professional advice to understand their liability for Capital Gains Tax on inheritance. 

How do you pay Capital Gains on Inherited property?

In order to pay Capital Gains on inherited property you will need to determine how much you owe, calculate the gain and deduct any allowances (we will cover this next).

If you reside in the UK, and you owe capital gains tax on inheritance property, you must report the gain to HMRC using the Self-Assessment tax return system. If you dispose of a residential property and make a capital gain on inherited property then you must report and pay the CGT within 60 days of the completion of the sale.

Paying by the deadline will ensure that you miss any penalties and interest. 

If you’re looking to sell your inherited property and don’t know how much CGT to expect to pay, the next section will be of great use to you!

How much Capital Gains Tax will I have to pay on inherited property?

To accurately calculate the amount of Capital Gains Tax on inherited property you might owe, it’s essential to follow a structured approach. We’ve simplified this process into a series of clear, easy to follow steps below. By following these guidelines you can effectively calculate your potential Capital Gains Tax on inheritance property liability:

Calculate your total gain

First, you will need to work out your total gain or profit. This will be the value of the sold property, minus its original value and all costs involved.

For example

• Sale price of the property: £200,000

• Inherited value of the property: £100,000

• Estate agent fees: £2,000

• Solicitor’s fees: £2,000

Calculation: £200,000 - £100,000 - £2,000 - £2,000 = £96,000

Your total gain on the inherited property is £96,000.

2.Apply annual exempt amount

For the 2024/25 tax year, the annual exempt amount is £3,000.

Taxable gain calculation:

£96,000 (Total Gain) - £3,000 (Annual Exempt Amount) = £93,000 (Taxable Gain)

3. Determine tax bands

Your annual income: £34,000

Personal Allowance for 2024/25: £12,570

Taxable income calculation:

£34,000 - £12,570 = £21,430 Taxable Income

The basic rate band extends to £50,720. Since your taxable income is £21,430, you have:

£50,270 - £21,430 = £28,840 of your gain taxed at the basic rate.

The remaining gain:

£93,000 - £28,840 = £64,160, taxed at the higher rate.

4. Calculate Capital Gains Tax

Basic Rate Tax (18% for property):

£28,840 x 18% = £17,964.80

Total Capital Gains Tax payable:

£5,191.20 + £17,964.80 = £23,156

5. Total

• Total Gain: £96,000

• Taxable Gain: £93,000

• Total Capital Gains Tax payable: £23,156

You can calculate Capital Gains Tax on inheritance property on the UK Government website.

If I inherited a house is it taxable?

In the United Kingdom, inheriting a house involves several tax considerations, primarily Inheritance Tax and Capital Gains Tax, but it’s important to understand that the tax implications vary based on different circumstances. 

Inheritance Tax (IHT)

When you inherit a house, the primary tax concern is usually inheritance tax. This tax is levied on the estate (the total value of money and property) of someone who has died. Whether or not inheritance tax is due depends on the value of the estate and to whom the property is left.

If the total estate is valued below the IHT threshold, which is £325,000 as of April 2023, no Inheritance Tax is due. Anything above this threshold is potentially taxable. However, there are exemptions, such as property left to a spouse or civil partner, which usually doesn’t incur IHT.

Capital Gains Tax (CGT)

While there’s no Capital Gains Tax on inheritance to pay at the time you inherit the house, it may become relevant if you decide to sell the property later. As mentioned above, Capital Gains Tax is calculated based on the increase in the property’s value from the time of inheritance to the time of sale.

The value of the property at the time of the original owner’s death is used as the base cost for calculating any gain. If you sell the inherited property and it has increased in value, you may have to pay Capital Gains Tax on the profit, taking into account any exemptions or reliefs you’re eligible for, such as Principal Private Residence Relief if you’ve been living in the property.

Principal Private Residence Relief

If you move into the inherited property and it becomes your primary residence, you may qualify for Principal Private Residence Relief, which can significantly reduce or eliminate Capital Gains Tax when you sell the property. 

PRR Relief applies to a property that has been your main or only residence. If you inherit a property and subsequently use it as your primary residence, you may become eligible for this relief. 

For inherited properties, the base cost for Capital Gains Tax purposes is the market value of the property at the time of the original owner’s death. Any increase in value from that point until you sell the property is subject to Capital Gains Tax, subject to PPR Relief for the periods it was your main residence.

If you own more than one property, you can only nominate one property as your main residence at any one time for PPR Relief. If the inhibited property becomes your primary residence, you should formally nominate it as such with HMRC.

If you let out the property after living in it, you may also be eligible for Letting Relief, which can further reduce your Capital Gains Tax liability, although recent changes have limited the scope of this relief. 

Renting out the inherited property

If you decide to rent out the inherited property, you may need to pay Income Tax on the rental income. The income you earn from renting out the property is subject to Income Tax, which must be declared to HM Revenue & Customs (HMRC).

You can deduct certain expenses from your rental income before calculating the tax due. These expenses include, but are not limited to, property maintenance and repairs, letting agent fees property insurance and mortgage interest. 

The taxable rental income is calculated by taking the total rental income for the tax year and subtracting any allowable expenses, the remaining amount is what you pay tax on.

Additionally, when you sell the property, Capital Gains Tax might be due on any increase in value from the time you inherited it.

Difference between inheritance tax and Capital Gains Tax on inherited property

When you inherit a property, it’s natural to wonder why Capital Gains Tax applies even after dealing with Inheritance Tax. Understanding the distinction between these two taxes is key to grasping the financial implications of inheriting estate assets. 

Inheritance Tax is levied on the entire value of the deceased’s estate if it exceeds £325,000, at a rate of 40%. This tax encompasses all aspects of the estate, including property, savings, shares and other assets. 

Inheritance Tax reflects the transfer of wealth from the deceased to the beneficiaries and is usually handled by the executor of the will. It’s important to pay this tax within 6 months of the person’s death to avoid interest charges on the overdue amount. 

On the other hand, Capital Gains Tax on inherited property is a separate entity, Capital Gains Tax is not triggered simply by inheriting an asset; it comes into play only if you decide to sell the inherited property.

The critical factor here is the gain - the difference in the property’s value from the time of inheritance to the time of sale. 

This means you’re not taxed on the entire sale value, but only on the profit made, if any. Given the tendency for property values to rise over time, it’s common to face a significant Capital Gains liability upon selling an inherited property, especially after it has been through probate and market valuation. 

While inheritance tax is concerned with the initial transfer of the estate, Capital Gains Tax on inheritance focuses on the profit realised from the subsequent sale of an inherited property. Both taxes are integral to estate management but they serve different purposes and are triggered by different events. 

Here is a table to breakdown the difference between CGT and IHT:

Do you have to pay Capital Gains Tax under the Rules of Intestacy?

Under the Rules of Intestacy, if the administrators of an estate sell a property before it is passed to the beneficiaries, there is generally no Capital Gains Tax liability if the sale occurs within two years of the date of death, as long as the property has not significantly increased in value during this period.

However, if the property is sold after this two-year window and has appreciated in value, Capital Gains Tax may be payable by the estate on the difference between the sale price and the probate value (the property’s value at the time of death).

At the same time, the administrator is also responsible for paying Inheritance Tax owed on the property before transferring it to the beneficiaries.

If a beneficiary later decides to sell the inherited property, and the property is sold for more than its probate value, they will need to pay Capital Gains Tax on the gain (the difference between the sale price and the probate value).

However, if the beneficiary lives in the property as their main residence, they may qualify for Private Residence Relief, which could exempt them from paying Capital Gains Tax on the sale.

Do I pay CGT on a gifted property?

When you receive a property as a gift, it’s important to understand the potential Capital Gains Tax implications both at the time of receiving the gift and if you decide to sell the property later.

Initially, when you receive a property as a gift, you usually won’t incur any Capital Gains Tax liability. At this point, no sale or ‘disposal’ in the traditional sense has occurred, which is the usual trigger for CGT.

If you sell the gifted property, Capital Gains Tax may be applicable on any gains made. The gain is calculated as the difference between the property’s market value when it was gifted to you and the sale price you achieve. The gain represents the increase in the property’s value during your period of ownership.

For Capital Gains Tax purposes, the property’s value at the time of the gift becomes your base cost, or base value. It is essential to have an accurate valuation of the property at the time of the gift, as this will be used to calculate any potential capital gain when you sell it. 

Receiving a property as a gift from family members such as parents or other relatives, doesn’t provide any exemption from Capital Gains Tax upon its eventual sale. The rules for calculating CGT are the same as for any gifted property. 

If the donor (the person who gifted you with property) continues to use the property, such as living in it, the gift may be classified as a gift with reservation of benefit. This can have complicated implications, potentially affecting both CGT and Inheritance Tax. 

For CGT, it might impact the availability of certain reliefs and for Inheritance Tax, it might mean the property is still considered part of the donor’s estate. 

Do you have to pay Capital Gains Tax on a gifted property if it was gifted to avoid probate?

When a property is gifted to avoid probate, the property will still fall under the realm of usual property gifting rules. However, if you decide to sell the property then you will become liable to Capital Gains Tax on inheritance. The gain is calculated as the difference between the property’s value at the time it was gifted and its selling price. 

Something to watch out for in this scenario however, is the inheritance tax considerations. If the person who gifted the property lives for seven years after making the fit, the property will fall outside their estate for inheritance tax purposes.

However, if the original owner passes away within seven years, then you may be liable to pay inheritance tax, which currently stands at 40%. 

Do you pay CGT when gifted property to someone else?

If you choose to gift your property to someone else, this will be treated as a disposal for Capital Gains Tax purposes. Here, Capital Gains Tax is calculated as though you sold the property at its market value at the time of the gift. This may result in a Capital Gains Tax liability for you, even though you haven't received any sale proceeds. 

If the gifted property has been your main home, you may qualify for Principal Private Residence Relief, which can significantly reduce or even eliminate the Gains Tax on the sale. Although this will depend on the duration the property was your main residence. 

If there is CGT liability on the transfer or sale of the gifted property, you will need to file a Capital Gains Tax report and pay the tax within 60 days of the completion of the transaction.

What would my Capital Gains Tax be on jointly owned inherited property?

Calculating Capital Gains Tax on jointly owned inherited property might depend on various factors, including the property’s value at the time of inheritance, its value at the time of sale, and any allowable directions or reliefs. 

If the property is jointly owned with a spouse or civil partner, each of you can use your annual exemption, potentially doubling the amount of gain that can be exempted from Capital Gains Taxon jointly owned inherited property.

Here is a general outline of how to calculate Capital Gains Tax on jointly owned inherited property:

Inheriting a house with siblings: example calculation

Suppose you and your sibling inherited a property valued at £300,000 at the time of the original owner’s death. You later sell it for £400,000, making a gain of £100,000. 

Step 1: Deduct Allowable Expenses

• Allowable expenses: £10,000

• Net Gain: £100,000 - £10,000 = £90,000

Step 2: Split the Gain (50% Ownership)

• Your share of the gain: £90,000 x 50% = £45,000

Step 3: Apply the Annual Exempt Amount

• Annual Exempt Amount for 2024/25: £3,000

• Taxable Gain: £45,000 - £3,000 = £42,000

Step 4: Calculate Capital Gains Tax

If you’re a basic rate taxpayer (18%):

• £42,000 x 18% = £7,560

Inheriting a house with partner: example calculation

Suppose you and your partner inherited a property valued at £250,000 at the time of the original owner’s death. You later sell it for £300,000, making a gain of £50,000. 

Step 1: Deduct Allowable Expenses

• Allowable expenses: £6,000

• Net Gain: £50,000 - £6,000 = £44,000

Step 2: Split the Gain (50% Ownership)

• Your share of the gain: £44,000 x 50% = £22,000

Step 3: Apply the Annual Exempt Amount

• Annual Exempt Amount for 2024/25: £3,000

• Taxable Gain: £22,000 - £3,000 = £19,000

Step 4: Calculate Capital Gains Tax

If you’re a basic rate taxpayer (18%):

• £19,000 x 18% = £3,420

Inherited a house and want to sell it? Here’s how!

When you’ve inherited a house and want to sell it, there are many different ways in which you can do so; with an estate agent; through auction and to a cash buyer.

Ideally, when selling an inherited property you will want to get the fastest sale possible, to try to limit the increase in the property’s value to reduce the amount of CGT on inherited property you will have to pay.

Should you use an estate agent for inherited property?

The first method you may think of when it comes to selling a property is with an estate agent on the open market. You will need to speak to a few different estate agents and explain that the property is inherited to see whose services will be more in line with what you need.

Once you’ve chosen your estate agent, they will value the property for you, get photos and a floorplan done and then put it onto the open market. From then, you will have to host viewings until you find yourself a buyer.

Whilst selling your house on the open market might be the most ‘traditional’ way of selling, this doesn’t necessarily mean it’s the best.

For example, estate agents tend to overvalue properties quite significantly so whilst you may initially look like you’re making a larger profit, you’re actually just meaning you will have to pay a larger amount of Capital Gains Tax on inheritance property.

Also, selling on the open market with an estate agent isn’t a quick sale and could lead to your property being on the market for months, sometimes even over a year, meaning there’s a higher chance the property will increase in value, meaning more profit and more CGT on inherited property.

As a result of this, selling through the open market may not be the best way to sell and minimise the Capital Gains Tax on inherited property.

Should you use a property auction for inherited property?

Another option when it comes to selling inherited property is selling through auction. Auction may be better suited than selling through the open market as buyers tend to look to pick properties up at a discount of the market value, meaning you may make less of a profit and will therefore have less inherited property CGT to pay.

The buyers at auction will all have their finances in place and will be ready to exchange contracts and put down a deposit when the hammer comes down on a deal. After auction, the buyer then has 20 to 28 days to complete the sale, therefore meaning it should be quicker than on the open market.

However, at auction there are no guarantees that your property will sell as the reserve price you set may end up not being met. You will also have to hold several open days for potential buyers to inspect the property, which may be difficult for you with the house acting as a reminder of the person who has passed.

Also, even though auction may be a faster method of sale compared to the open market, it’s still not the fastest method, with you potentially having to wait months before your property is approved for auction and then you will have to wait for a slot to become available.

You will also have to pay marketing costs, auctioneer’s commission fee, room hire and legal fees, meaning you could end up paying for these out of your own pocket.

Should you use a cash buyer for inherited property?

The final option for selling your property is to sell to a cash house buyer.

A cash buyer doesn’t require any kind of external funding from a lender, meaning they can buy fast, and they look to pick properties up at a discount, meaning you may make less profit and therefore have less CGT on inherited property to pay.

Also, selling to a cash house buyer, whether it’s an independent investor or a company, like ourselves, there will be less paperwork involved – something we’re sure you’re pleased to hear after going through probate.

In fact, if you sell to us as your cash buyer, we will handle the whole process and all the paperwork for you from start to finish, leaving you only having to give us a signature.

On top of this, we only require one quick viewing of your property, to check our cash offer is accurate, and we can buy the property in a fast timescale of your choice – anything to make a difficult process easier for you.

As a result of our fast-purchasing times, your property won’t have time to increase in value which would leave you with large amounts of Capital Gains Tax on inheritance to pay.

There’s no need to worry about having any fees to pay when selling to us, as we will cover them all for you, including the legal ones! Yes, that does mean you get our full offer in cash in your bank!

We’re also members of The Property Ombudsman and the National Association of Property Buyers and we’re rated ‘excellent’ on Trustpilot with over 1,000 reviews, showing we’re a cash buyer you can trust.

To add to this, we also have over 50 years of combined experience, so you could say we’re quite the experts on Capital Gains Tax on inherited property.

We know what it’s like to sell a property and how stressful it can be, without the added stress of probate and losing a loved one, so we will always be happy to listen to your worries and reassure you every step of the way.

Give us a call or fill in our online form to receive a no-obligation cash offer for us to buy your property as soon as possible to help avoid Capital Gains Tax on inherited property.