Capital Gains Tax may be applicable on inherited property in the UK. The tax is calculated based calculating capital gains tax on the increase in value from the date of inheritance to the date of disposal. There are certain exemptions and reliefs available.
Inheriting property from a late family member can be a complex experience, with emotional and financial considerations. Beneficiaries receiving an interest in a property should be aware of the details of capital gains tax (CGT) to manage their tax liabilities.
Understanding CGT implications can help them make informed decisions regarding the inherited property and its potential sale or transfer. Seeking professional advice is advisable in such situations.
All beneficiaries should carefully consider the implications of Capital Gains Tax (CGT) when dealing with inherited property. It is advisable to seek legal advice before making any decisions. For any queries about CGT, please contact us at 03300 575 902
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax imposed on the profit realized from the sale or disposal of an asset that has increased in value during ownership. When a qualifying asset is sold for a gain, the difference between its initial value when acquired and the selling price may be subject to CGT.
This tax applies to various assets such as property, stocks, shares, and personal possessions. In the context of inherited property, CGT implications may arise if the property is sold for a profit. It’s important for individuals to understand the specific rules allowable deductions, and exemptions related to CGT on inherited property to ensure compliance with tax obligations.
How much Capital Gains Tax will I have to pay when selling an inherited property?
The Capital Gains Tax on the sale of an inherited property is calculated based on the difference between the property’s fair market value at the time of inheritance and the selling price. The tax rate will depend on your income and the length of time you owned the property before selling it. It’s recommended to consult with a tax professional for an accurate assessment.
Capital Gains Tax when someone dies
When a person dies, there is no immediate Capital Gains Tax (CGT) charge. Special rules apply when beneficiaries sell any chargeable inherited assets for a gain. The assets are treated as being passed to beneficiaries at market value as at the date of death, also known as the probate value. This means that the CGT charge would be based on any gain in value from the probate value to the selling price.
Capital Gains Tax on Inherited Property
In the UK, inheritance tax is paid on the value of the deceased’s estate at the time of their death, rather than taxable income rather than capital gains tax (CGT). When a deceased person’s property is transferred directly to a beneficiary, no CGT is payable, as the estate acquires the assets at their probate value.
When a beneficiary sells an inherited property that was not their main residence for more than the probate value, they may be liable to pay Capital Gains Tax (CGT) on the gain. Personal representatives overseeing the estate can sell the property without transferring all of it to the beneficiaries. The estate has an annual exemption for the capital gains tax allowance the year of death and the following two tax years.
In certain situations, it’s possible to make use of both the personal representatives’ CGT annual exemptions and those of the beneficiaries to minimize the tax liability. Understanding the CGT rules and exemptions can help in effectively managing the tax implications of selling inherited property.
Siblings inheriting parents’ property
In the scenario where siblings inherit their parents’ property and decide to sell it, they may need to consider Capital Gains Tax (CGT). If the property is sold for more than the probate value, CGT is applicable on the increase in value. However, the siblings can potentially save on CGT by using their yearly allowances and spreading out the gains.
On the other hand, if the property is sold for a loss, this loss can be used to offset the beneficiaries’ personal CGT liability. It’s important for siblings to be aware of these potential tax implications when dealing with inherited property. Consulting a tax professional for personalized advice is recommended.
In certain situations, inherited property may be passed on to beneficiaries and sold without any capital gains tax (CGT) payable. This occurs when the beneficiary inherits the property at its market value at the time of inheritance, and later sells it at the same market value without taxable gain. In such cases, as there is no gain, there is no CGT payable on the sale of the inherited property.
As a UK resident, it is important to note that when you sell or dispose of a property in the UK and are liable to pay Capital Gains Tax (CGT), you are required to inform HM Revenue & Customs (HMRC) within 60 days of the completion date.
It is also worth mentioning that personal representatives (Executors) do not pay income tax due at the same time as submitting the online return. Instead, HMRC will contact the personal representatives with the amount due and provide payment instructions.
How can I reduce my Capital Gains Tax exposure on Inherited Property?
The UK tax system allows for CGT exemptions and allowances paid tax on on inherited property, which can reduce or eliminate the tax liability.
Annual Exemption
As of August 2023, individuals have an annual Capital Gains Tax (CGT) exemption threshold of £6,000 for the 2023/2024 tax year, while trusts have a £3,000 exemption. This means that the first £6,000 of capital gains for individuals and £3,000 for trusts are exempt from CGT.
Spouse Exemption
If a beneficiary decides to transfer their share of an inherited property to their spouse or civil partner before the sale (exchange of contracts), the transfer will be exempt from Capital Gains Tax (CGT). This means that any additional CGT annual exemptions can be utilized in this situation.
Principal Private Residence Relief
This relief applies to gains made on the disposal of a property that has been the individual’s main residence. It can reduce or eliminate Capital Gains Tax on the proportion of time the deceased owned the property and the period the beneficiary lived in it as their main residence. This relief can be a valuable consideration in estate planning and probate.
Charity Exemption
Assets sold by or on behalf of a charity are not subject to Capital Gains Tax (CGT). However, if you sell an asset to a charity, you would still need to pay CGT on any gains made. Personal representatives can assign some or all of an interest in a property to a charity before sale (exchange of contracts) to avoid CGT charges for the estate. This can help minimize tax implications and maximize the benefit to the charity.
Allowable losses
You can report losses on a chargeable asset to HMRC, which can help reduce your total taxable gains in the same tax year. The loss is deducted from the gains you’ve made in that year. If your total taxable gains still exceed the tax-free allowance, you can deduct unused losses from previous tax years. If these unused losses bring your gains down to the tax-free allowance, you can carry forward the remaining losses for future years. It’s important to keep track of these losses for tax purposes.
How long do I have to live in an inherited house to qualify for Principal Private Residence Relief?
Principal Private Residence Relief (PPR) applies to your main residence, preventing Capital Gains Tax (CGT) upon sale. To qualify, you must demonstrate that the property has been your main residence by residing there consistently throughout your ownership and avoiding prolonged absences.
This relief is important for homeowners looking to sell their main residence without incurring CGT. Meeting the criteria for PPR can help individuals save money and ensure a smooth sale process for their main residence.
The period of ownership for a property begins on the date of acquisition and ends when the property is disposed of. The final 9 months of ownership always qualify for relief, regardless of how the property is used, as long as it has been the owner’s only or main residence at some point. For disabled individuals or those residing in a care home, this period is extended to 36 months. This information is important for individuals looking to understand the rules and regulations regarding property ownership and relief eligibility.
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 total gain made by a fraction equal to the periods of occupation (including the final 9 months of ownership). This ensures a fair and accurate allocation of gains.
If you own more than one property
If you own multiple properties, it’s important to nominate which one is your main residence within 2 years of acquiring the additional property. Failure to nominate may result in the determination of your main residence based on the facts of the matter. This nomination is necessary for tax and legal purposes.
In certain situations, you may not be able to move into a new property immediately after acquiring it. This could be due to issues such as being unable to sell your old property or needing to make renovations to the new one. In these cases, you can consider the first 24 months of ownership as if the house had been your only or main residence during that period.
Calculating CGT can be complex. If you need assistance, contact our Wills, Trusts, and Probate Team for help. They are happy to assist with any questions or concerns you may have.
Seeking Professional Advice
Navigating the complexities of Capital Gains Tax on inherited property can be challenging as tax rules and allowances may change over time. It is crucial for personal representatives and beneficiaries to seek professional advice from experts. At Target Accounting, Property Tax Accountants can provide tailored guidance based on your specific circumstances to ensure compliance with tax regulations and maximise any available reliefs. Our team can help ease the burden of understanding and managing the tax implications of inherited property.
Conclusion
In the UK, inheriting property can have implications for Capital Gains Tax (CGT). It’s important for beneficiaries to understand whether the inherited property is considered a chargeable asset or a no-gain, no-loss transfer. Being aware of exemptions and allowances can help beneficiaries effectively manage their tax liabilities.
If you have any questions about estate planning or Capital Gains Tax, please contact Professional Property Tax Accountants who would be happy to help.
Frequently Asked Questions:
What is Capital Gains Tax (CGT) on inherited property in the UK?
CGT is a tax on the profit made when selling or disposing of an asset, including inherited property.
Do I have to pay Capital Gains Tax on inherited property?
In most cases, yes. When you sell or dispose of inherited property, you may be liable to pay CGT on any increase in value since the date of inheritance.
What is the current Capital Gains Tax rate for inherited property in the UK?
The CGT rate for inherited property depends on your individual tax situation. The rates are 10% for the basic rate tax band of taxpayers and 20% for higher rate taxpayers.
Are there any exemptions or reliefs available for Capital Gains Tax on inherited property?
Yes, there are various exemptions and reliefs available, such as the annual basic rate income tax take-free allowance, letting relief, and private residence relief, which may reduce the CGT liability.
How is the value of inherited property determined for Capital Gains Tax purposes?
The value of inherited property for CGT purposes is usually based on the market or value of the property at the date of inheritance, as determined by a professional valuation if necessary.
Are there any time limits for reporting and paying Capital Gains Tax on inherited property?
Yes, you must report and pay any CGT due within 30 days of the sale or disposal of the inherited property.
What documentation do I need to keep for Capital Gains Tax on inherited property?
It’s important to keep records of the amount pay inheritance tax amount, any improvements made to the property, and the sale or disposal transaction for CGT reporting purposes.
Can I transfer inherited property to a family member without incurring Capital Gains Tax?
Transferring inherited property to a family member may have CGT implications, and it’s important to seek professional advice to understand the potential tax consequences.
What should I do if I inherit property from overseas?
Inheriting property from overseas may have different tax implications, and it’s advisable to seek advice from a tax professional who is familiar with international tax laws.
Where can I find more information about Capital Gains Tax on inherited property in the UK?
You can find detailed information on the official website of HM Revenue & Customs (HMRC) or consult with a qualified tax advisor for personalised guidance.
