Do I Pay Capital Gains Tax on Inherited Property When Selling?
Looking at the tax implications when selling inherited property, whether you pay inheritance tax on inherit a property.
Alexandra Ventress ★ Digital Content Writer
Table of Contents
Inheriting a house can mean lots of different things for lots of different people. It can be a time of sadness, stress, and emotion. However, you can also find yourself on the receiving end of a lot of different taxes, from inheritance to income and capital gains.
In this blog post we are going to have a look at the different types of taxes involved with selling a house, how to sell an inherited home, and aim to answer the question “Do I pay capital gains tax on inherited property when selling?”
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What tax to pay on an inherited property?
When you inherit a property, you may find yourself facing several different types of taxes. Some of the most common ones you may find yourself dealing with are:
If you sell the inherited property, then you may have to pay capital gains tax.
Should the combined value of the deceased estate (property, savings, shares, etc.) be more than £325,000 then it will be due, however, there are certain circumstances where this would not apply.
If the property that you have inherited is a buy-to-let or a holiday let, then you will need to start paying income tax once you start receiving income from rent.
Below we take a closer look at some of the tax on an inherited property…
Capital Gains Tax
Capital Gains Tax (CGT) is a tax that you will only need to pay if you decide to sell the property. Should the property have increased in value from the date that you first inherited it, you may be due to pay it on the rise in value (the profit).
If you are a basic rate income taxpayer, then CGT will be levied at 18% on gains from residential property. This rate will rise to 28% if you are a higher or additional rate taxpayer.
Everyone gets an annual CGT allowance, which is £6,000 per person for the tax year for 2023/24. However, this amount will be cut to £3,000 per person for the 2024/25 tax year.
Unless you have used up your capital gains tax on an inherited property will not be due if the profit is less than £6,000. This is the amount of profit you can make from selling taxable assets (including property that is not your main residence) before CGT is due to be paid.
If you decide to move into the inherited property and make it your main residence, then you will not owe any capital gains tax when you sell it.
Inheritance Tax
Whether or not you will be liable to pay inheritance tax will depend upon the value of the deceased’s estate. As a rule of thumb, if the total estate is worth more than £325,000 then 40% of everything over that amount will need to be paid in tax.
However, there are some exceptions to this rule. If you have inherited your parents or grandparents’ property, you are a direct decedent and may be entitled to have some of this bill reduced.
The main residence nil-rate band is £175,000 for the tax year 2023/24. This allowance is then added onto the main inheritance tax nil-rate band of £325,000. You could be able to inherit a property worth up to £500,000 without having to pay the tax, depending on the value of the estate.
If you inherit your property from a dead spouse or partner, then there will be no inheritance tax to pay. There are allowances can also be passed between spouses or civil partners. This means that in the unfortunate circumstances that one of your parents or grandparents has died but they have not used their tax allowances, then you may be able to inherit an even more valuable property tax-free.
An example of this would be if both of your parents have died, and the first to die passed all of their assets to the surviving spouse, when that spouse dies they can pass on a property worth up to £1,000,000 to their children or grandchildren tax-free.
You have 6 months after a person’s death to pay tax which should be settled by the executors of the estate. You should be able to pay the tax in monthly instalments if you wish, which should help to avoid a situation where in order to settle the bill you would need to sell the property.
Income Tax
Income tax is not a tax you will have to worry about paying when it comes to inherited property unless you start earning an income from it. If you rent out your property and receive rent, then you will need to declare this on a self-assessed tax return. Income tax will be due at your marginal rate, which will then be dependent on your total income for the year.
How long do I have to live in an inherited house to avoid Capital Gains Tax?
When you inherit a home, you are left with a few options. You can rent it, sell it, or live in it. If you decide to rent it out, you will need to be aware that you will have to pay income tax, as well as capital gains tax when the time comes to sell the property, if it has risen in value.
If you decide to live in the property, then you will not have to pay CGT, as long as it is your main residence. This means if you already have a property, then you will need to sell it and move into the inherited home.
If you decide to sell the property and there is no rise in value during that time, then you may be able to avoid CGT. Similarly, if there has been rise of £6,000 or less and you have not used up your annual tax allowance for that tax year, then you may be able to avoid CGT.
How much is Capital Gains Tax?
Exactly how much you will pay in CGT will depend on a variety of different factors involving both you and the asset.
An example of this would be:
- The type of asset
- How long you have owned the asset
- Your tax situation
- The core value of the asset
How to work out capital gains tax to pay
When it comes to working out how much Capital Gains Tax you have to pay, you will first need to work out what band of taxpayer you are.
Your next step should be to figure out your taxable gains, which is the amount of money you will have made after deducting any allowable losses.
Next, you should take away the CGT tax-free allowance, and you will now be left with a sum that is subject to CGT.
An example of this would be:
Taxable gain = £20,000 Allowable losses: £3,000
Calculate the total taxable gain:
£20,000 – £3,000 = £18,000
CGT tax-free allowance + £6,000
Calculate the amount subject to CGT:
£18,000 – £6,000 = £12,000
Once you have worked out the taxable amount, you can now work out what percentage of CGT you are liable to pay.
| Band | Taxable income | CGT rate for residential |
|---|---|---|
| Personal allowance | Under £12,570 | 0% |
| Basic rate | £12,571 - £50,270 | 18% |
| Higher rate | £50,271 - £125,140 | 28% |
| Additional rate | £125,140+ | 28% |
What tax rate am i?
Amount subject to CGT: £12,000
Your annual income: £30,000
Taxpayer: £12,000 + £30,000 = £42,000 (Basic rate – 20%)
Do I have to pay Inheritance Tax on my parents house?
Typically, there will be no tax to pay if:
- Your estate’s value is below the £325,000 threshold
- Everything above the tax threshold is left to an exempt beneficiary, such as a community club or a charity
- Everything above the threshold is left to a spouse or a civil partner
- If you give your home away your property to your children or grandchildren your threshold can increase to £500,000
If your estate has been valued and is above the £325,000 threshold, then the part of your estate above this may be liable for tax at the rate of 40%.
Can I give my house to my son to avoid Inheritance Tax?
Yes, you can! There are many ways that you can do this, however the most common is to gift property by way of “transfer for nil consideration” or a “deed of gift”, as it is commonly known). This is often done as a way to help reduce the amount of inheritance tax they need to pay.
In order for your child to receive the property tax-free, they would need to be in possession of it for 7 years before you die. For every year they own the property, the amount of tax they would be liable to pay tapers off. Below is a graph showing the reduction of tax:
| Years between gift and death | Tax paid |
|---|---|
| Fewer than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
Are there any conditions to meet before gifting a property?
Before you will be able to gift your property to your child, you must first meet the following criteria:
- Be listed as the owner of the property with HM Land Registry
- Be of sound mind
- Be under no pressure
- Have no outstanding mortgage
- There is no charge against the property
How much can you inherit from your parents without paying taxes UK?
As we have already mentioned, there is a set amount that you can inherit before you will have to pay tax based on inheritance. The most you will be able to inherit before you will need to pay tax is any property worth £325,000 or less. Any more than that and you will need to pay inheritance tax.
What is the most you can inherit without paying taxes?
The exact amount that you will inherit depends upon a wide variety of factors, however, as a rule of thumb you can expect to inherit an estate worth £325,000 or less.
The table below shows the most that you can potentially inherit without paying taxes.
| Tax year | Nil-rate band (£) | Residence nil rate band (£) | Total for individuals (£) | Total for couples (£) |
|---|---|---|---|---|
| 2022/2023 | 325,000 | 175,000 | 500,000 | 1,000,000 |
How to sell an inherited property
When it comes to selling an inherited property, the first thing you will need to do first is to clear the property of its contents. You need to sort through the items and decide what you wish to keep, and what you will either donate to charity or throw away.
If you don’t wish to face clearing out the house or you are too busy, then you could consider moving the items into storage.
You may want to consider doing up the property before you sell it, depending on the condition it is in. This is because often properties owned by older people tend to look a little dated and giving it a quick facelift can be a good way to add some extra value to the property.
The property is then ready to go on the market! You can start looking for estate agents to market your property.
Selling an inherited property can be an overwhelming experience and one that is often stressful and time-consuming. But it doesn’t have to be. If you have an inherited property that you are looking to sell, then The Property Selling Company is here to help.
We believe that a house sale should be three things: fast, effortless, and free. We have made it our mission to change the way you sell houses, which is why you can say goodbye to the days of waiting around on the open market, racking up expensive legal and estate agent bills.
Our dedicated team of property experts are here to take care of everything and work alongside you throughout every step of the selling process. We take the stress out of property sales, helping you sell your inherited property in as little as 28 days and without the fees.
If you are ready to sell an inherited property, get in touch with us today or fill in one of our free online valuation forms!
