What do I need to do if I inherit a property?
There may be a time in life where you find that you have inherited a property. If this is the case, there is a lot of things to consider.
Some questions you should ask yourself, should you keep the inherited property or sell it on? What if it’s been left to you and another sibling jointly? Is there still a mortgage on the property? And what about all the legal stuff such as stamp duty, inheritance tax and capital gains tax? This blog post will cover all the above.
How do you inherit property?
There are a few ways in which you might find yourself inheriting a property:
- If it was held under ‘joint tenancy’.
- If the inherited property was owned outright by the deceased, or jointly by owners who have died, the terms of their will(s) set out who inherits.
- If the property was owned as a ‘tenancy in common’, who inherits the deceased person’s share is decided by the terms of their will
- If there is no will, who inherits the property in cases other that joint tenancy, depends on the laws of intestacy.
Tax and other debts on inherited property
The value of the deceased person’s share is counted as part of their estate, it does not matter how the inherited property was owned before that.
Where the property is let within the estate period, this income will need to be calculated and the appropriate tax paid by the executors of the estate. The income would also need to be distributed to the appropriate beneficiary of the deceased’s will.
How to register the property under your own name
You can register your ownership – and you can do so here.
This is not an essential step, unless the property is sold or mortgaged. By doing this, it will ensure you can prove the property is yours. If you are uncertain what actions to take, we recommend taking legal advice.
Taking on mortgage payments
If the property you have inherited already has a mortgage, it means that you must be the one to continue the monthly payments despite if you live there or not.
Can I rent the property out?
Yes, you can rent out an inherited property, but you must pay tax on the profit you make from the rental income.
This is reported via your Self-Assessment tax return by the 31st January after the end of each tax year. If you suspect you need to report rental income, we recommend speaking to our tax team.
What if I inherit a property in a trust?
A trust is a way of holding and managing money or property for people who may not be ready or able to manage it for themselves. If you’re left property in a trust, this will typically be an interest for your lifetime, and you are called the ‘beneficiary’.
The ‘trustee’ is the legal owner of the property. They are legally bound to deal with the property as set out by the deceased in their will.
Many other types of trusts exist and are governed by their trust deed which sets out how the income and capital should be used. Trusts range from simple arrangements to complex affairs and are trust team will be able to assist.
Do you have to pay stamp duty on inherited property?
No, if a property is left to you in a will, you don’t have to pay stamp duty, instead you will pay inheritance tax.
How much capital gains tax is there on an inherited property?
Inherited property is subject to Inheritance tax rather than Capital Gains Tax (CGT). Additionally, the base cost for tax purposes is increased to the probate value used when calculating the inheritance tax due.
For example, where you inherited a property from your parents worth £200,000 and sold it for £225,000 six months later. Assuming you have never lived in the property, we would have a capital gain of £25,000 (£225,000 less £200,000).
This amount could be reduced by your annual exemption allowance (£6,000 in 2023/24, £3,000 in 2024/25), any capital losses you have previously incurred and applicable tax reliefs.
This example generates a taxable gain and would need to be included on your 60-day CGT return. Our UK tax team have expertise completing these for both UK and non-UK tax residents.
When do you have to pay inheritance tax on an inherited property?
Inheritance tax is typically due where an estate is worth more than £325,000 for an individual or £650,000 for spouses. These amounts are known as the nil rate band, and inheritance tax is paid at 0% for any part of the estate which are covered by these amounts.
This means that estates worth less than these amounts are not subject to inheritance tax. There’s no inheritance tax to pay if the estate is left to a charity or a community amateur sports club.
If the deceased owned their home, or a share in it, the tax-free inheritance tax threshold can increase to £500,000 (£1 million for spouses), but only if the property is left to the children or grandchildren of the deceased – including adopted, foster or stepchildren – and the total value of the estate is less than £2 million.
Where the estate is valued above £2 million, this additional allowance is reduced by £1 for every additional £2’s of value.
The standard rate of inheritance tax in the UK is fixed at 40% and is payable based on the total value of the estate – which includes property, investments and any other assets. It must be paid to HMRC by the end of the sixth month after the person died. For example, if they passed away in May, you must pay it by 30 November of the same year.
This tax can be paid by the estate from any residual cash, or the will may specify who is required to pay the tax liability. This can form a large liability, and we therefore recommend that consideration is given to this point both when constructing your will and when you have inherited property.
What’s next?
Inheriting a property can be complicated, it’s always a good idea to get advice and guidance where you can. You might consider the following (subject to your personal circumstances and objectives)
- Keeping the property as a rental
- Occupying the property as your main residence
- Giving the property to your children
- Selling the property
- Donating the property to charity
If you need some guidance or advice, you can always get in touch with us here.
