At some point in your life, there may come a time where you find that you have inherited a property. The first question to ask yourself is whether you should keep the inherited property or sell it on? What if it’s been left not just to you, but also with another sibling or siblings? Does the property still have a mortgage? And then there is all the legal stuff such as stamp duty, inheritance tax and capital gains tax. There is a lot to consider and digest, and hopefully we can make this a little bit easier for you.

How do you inherit property?

There are a few ways in which you might find yourself inheriting a property:

• 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 it was held under ‘joint tenancy’;
• If there is no will, who inherits the property in cases other that joint tenancy, depends on the laws of intestacy.

Tax on inherited property

The value of the deceased person’s share of a property is counted as part of their estate.

If 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 generated would also need to be distributed to the appropriate beneficiary of the deceased’s will. If the property has been left to you and another person, you’ll need to discuss this.

Registering the property under your own name

When you transfer ownership of an inherited property, you’ll complete a series of different forms with the Land Registry depending on how your loved one owned the property. You can find more information here.

This step is not essential unless the property is sold or mortgaged but by doing this, it will ensure you can prove the property is yours. If you’re unsure what actions to take, the best thing to do is seek legal advice.

Taking on mortgage payments

If the property you have inherited already has a mortgage, you must continue the monthly payments regardless of whether you live there or not. If the property has been left to you and another person, you’ll need to discuss this with them how you manage this.

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 income is reported via a Self-Assessment tax return by the 31st January after the end of each tax year. If you need advice, the best thing to do is speak to an accountant.

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.

There are many other types of trusts and they 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 so it’s worth seeking advice and guidance.

Stamp duty on inherited property

If a property is left to you in a will, you don’t have to pay stamp duty. Instead you may need to pay inheritance tax.

Is there capital gains tax on an inherited property?

The inherited property is subject to Inheritance Tax rather than Capital Gains Tax (CGT), but some may need to be paid depending on what you choose to do with the property. Additionally, the base cost for tax purposes is increased to the probate value used when calculating the inheritance tax due.

For example, if you inherited a property from your parents worth £250,000 and sold it for £275,000 six months later, and assuming you have never lived in the property, there would be a capital gain of £25,000 (£275,000 less £250,000). This amount could be reduced by your annual CGT exemption allowance (£6,000 in 2023/24, £3,000 in 2024/25), any capital losses you have previously incurred and applicable tax reliefs. Again, this is a great time to seek advice from an accountant. This example does generate a taxable gain and so would need to be included on your 60-day CGT return.

When do you have to pay inheritance tax on an inherited property?

Inheritance tax is usually 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. The rate is usually 40% on anything above the nil rate band.

This means that estates worth less than these amounts are not subject to inheritance tax.

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 not just the property, but other investments and 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 so we would always recommend that consideration is given to this point both when constructing your will and when you have inherited property.

TL;DR

Inheriting a property can be complicated, and with a plethora of options, it’s always a good idea to get advice and guidance where you can.

Depending on your circumstances, some options you may want to consider include:

• Keep the property as a rental;
• Occupy the property as your main residence;
• Gift the property to your children;
• Sell the property;
• Donate the property to charity.

If you’ve inherited some property and would like some advice or guidance, get in touch with a member of the team.