Do You Pay Capital Gains Tax on Inherited Property?
Estimated reading time 6 minutes
“One thing in life is certain. Death and taxes.” In the UK, tax can be pretty confusing. One commonly asked question surrounds Capital Gains Tax and whether it needs to be paid on inherited properties.
In short, the answer is yes, you will have to pay Capital Gains Tax on inherited property if you sell it and the sale results in a profit. Sounds simple enough? Well, nothing with tax is ever truly simple. So, in this edition of our blog, we dive into how Capital Gains Tax on inherited property works so that you aren’t caught out should you ever need to sell a home passed onto you by a relative.
What is Capital Gains Tax?
Capital Gains Tax or GCT is the tax on the profit made when you sell something that has increased in value. This can often sound alarming, especially in property as the cash amounts can be quite high. But, to clarify and avoid confusion, the tax is paid on the profit, not the total value of the house sale.
Some items are tax-free and will be exempt from GCT too. Items Capital Gains Tax gets paid on currently include:
- Personal possessions worth £6000 or more excluding your car
- Property that is not your main home
- Your main home if you have let it out, used it for business or it is classed as very large
- Any shares not held in an ISA or PEP
- Any business assets
What are the Capital Gains Tax rates on an inherited property?
When you sell an inherited property, any profit is liable to be taxed as part of the Capital Gains Tax process. What you pay though will depend on your current status and the profit made.
If you are a higher-rate taxpayer, you will be paying 28% Capital Gains Tax on your gains from the property sale. If you pay basic rate tax, your CGT will be calculated at a rate of 18%.
Is there an allowance for Capital Gains Tax?
Yes. You will only pay tax on any gains of more than £6,000. But, from 2024, this amount will drop to £3,000.
I have already paid tax on inherited property
You have. That was inheritance tax though, which is somewhat different to CGT. Inheritance tax is paid for properties above a certain value at a tax rate set by the government. The current inheritance tax rate threshold is set at £32,5000 with a tax rate of 40%. However, the amount is only paid on the value of the estate above the threshold. Certain exemptions and allowances can also come into play meaning the actual amount of inheritance tax paid can be less than 10%.
When do I have to pay Capital Gains Tax on an inherited property?
You only pay Capital Gains Tax on a property when it delivers a profit upon its sale. Once the sale is complete, work out the value of CGT owed on the government website. You must then report it within 60 days. In many cases, the tax must also be paid within this time too. However, you should check with HMRC as government guidance can change at any time.
Do you pay Capital Gains Tax if you move into an inherited property?
If you opt to move into the property you have inherited, you do not need to pay any Capital Gains Tax. You will need to declare it as your main residence and should you come to sell it in the future, you will be entitled to private residence relief that takes away the need for CGT.
How can I reduce my Capital Gains Tax on inherited property?
In many cases, properties are passed onto family members after a death to help give them some added financial security. The last thing you want is to have much of that cash eaten up by taxes and charges. Luckily, there are some deductions you can apply to the profit made on the house sale which means less money is taxed and more is left for you.
The costs associated with selling the property and those accrued through home improvements can all be deducted. However, it is worth noting that improvements do not include general maintenance of the property. Should you add a new garage or installed a new kitchen for example, you could add those to your list of deductions. You can then also deduct any costs that have accumulated through inheriting the property itself.
All deductions will need evidence to support them so keep any documentation to back up the costs associated with the charges you wish to have deducted from your gain.
How much capital gains tax will I pay on an inherited property?
The Capital Gains Tax for an inherited property is calculated based on the value of the home when you inherited it.
To get an idea, let’s assume the house has been sold for £200,000.
- At the time you inherited it, it was valued at £175,000
- You carried out some improvements totalling £5,000
- To obtain the house after the death you spent £1,000
- To then market and sell the house cost you £5,000
This leaves you with a profit of £14,000.
You would now take your £14,000 and deduct the annual allowance of £6,000. This then leaves you with £8,000 to be subjected to Capital Gains Tax deductions.
How much those deductions are will vary on your status as we mentioned earlier. If you pay the higher tax rate, it will be 28%, and for those on basic tax, 18%. This means you would pay Capital gains tax as follows:
- 28% rate: £2,240
- 18% rate: £1,440
If you inherited a property valued at £200,000 at the time of inheriting it and sold it for the same amount you will not be required to pay any CGT as your net result is a loss after all fees are accounted for.
What if I don’t pay Capital Gains Tax on an inherited property?
Failing to pay a tax is a criminal offense and could see you encountering much more trouble than you may have expected! In fact, it can mean the total you are required to pay suddenly becomes much more. Current penalties vary based on how late the payments are, but they currently stand at:
|Period of Lateness
|3 months late payment
|Daily £10 penalty up to a maximum of £900
|6 months late
|5% of total tax or £300 if greater
|12 months late
|5% of the bill or £300 if greater, unless the taxpayer is deliberately withholding information
|12 months late and information withheld
|Penalty based on behaviour. Between 70-100% of tax due
If you are inheriting a property and are looking for a fast house sale to potentially help you avoid CGT then speak to Gaffsy. We operate as cash house buyers and can give you a fully open and honest, free cash offer for the property so you can have the house sold and funds within your account within as little as seven days.