Getting property from a deceased family member can be a difficult and emotional event. It frequently has consequences for both finances and emotions. To control their tax obligations and make wise decisions, beneficiaries of an estate receiving an interest in real estate must be aware of the specifics of capital gains tax (CGT). This guide will cover everything you need to know about capital gains tax on inherited property.

First, let us discuss the definition of capital gains tax. Then, we can move on to its implications on an inherited property in the UK.

What is Capital Gains Tax?

A tax charge that applies to the gain you make from selling your asset is called Capital Gains Tax (CGT). The calculation of CGT takes places on the profit you make. Which is the increase in value of the sale price in comparison to the purchase price. This applies to assets that you hold for more than one year.

Usually, CGT applies to the following:

• Shares.
• Investment funds.
• Sale of a business.
• Second homes.
• Valuables including jewellery, art, and antiques.
• Inherited properties.
• Assets that you transfer at below their market value.

These assets are currently subject to capital gains tax at rates that differ from income tax rates. This is because investing in such assets is viewed as a risk, whether it be investment-related or entrepreneurial, and so, the potential payoff for taking on further risk is higher.

How Does CGT Work in the UK?

There is no automatic deduction by HMRC in case of CGT, unlike income tax. This means that you must report it.

Since various fiscal triggers exist, you should know what requires reporting. If you fail to provide accurate reports to HMRC, you will end up facing a fine that is more than your tax bill. Therefore, notifying HMRC is crucial. Do you need to pay capital gains tax on inherited property?

What are the Capital Gains Tax Rates 2023/2024?

It is important to note that CGT rates are different from income tax rates. Two broad brackets exist in case of CGT. One is of basic rate taxpayers and the other of higher/additional rate taxpayers. For basic rate taxpayers the CGT rate is 18% on residential property and 10% on other assets. Whereas for higher rate taxpayers the CGT rate is 28% on residential property and 20% on other assets.

Type of Asset	Basic Rate Taxpayer	Higher/Additional Rate Taxpayer
Residential property	18%	28%
Shares (not held within an ISA or PEP)	10%	20%
Other	10%	20%

What is Capital Gains Tax Allowance?

You do not need to worry when doing your tax return as you have a capital gains tax allowance.

Now, how much is this allowance? Well, for individuals it is £6,000 in the 2023/2024 tax year. Whereas for trusts it is £3,000. This means that you can make a profit of up to £6,000 before CGT begins to apply. A reduction is going to place in April 2024 as it will go down from £6,000 to £3,000 for individuals. Therefore, it is important to know if you need to pay capital gains tax on inherited property.

For those who have joint ownership of a taxable asset, the allowance is double the amount. Which means up to £12,000 of gains is exempt from CGT. An example of joint ownership of a taxable asset is a second home.

If you transfer assets to your partner, and make a gain afterwards, the rules change. The CGT that you owe depends on the total time of your ownership of the assets together instead of the date of transference.

When you sell your primary residence, you do not need to pay CGT. However, it does apply when you sell your second home. Also, it applies when you let out your primary residence or use it for business purposes. Depending on your tax bracket, the CGT rate is either 18% or 28%.

When it comes to stock and shares, the CGT rate depends on your tax bracket as well. The rates are different in this case. They are either 10% or 20%.

What is the Process of Paying CGT?

You can report CGT through a self-assessment tax return if you are currently completing it.

If not, then you can use the government’s CGT service to pay the amount you owe right away.

The next section will cover the deadlines for paying capital gains tax in the UK. Then, do you owe capital gains tax on inherited property?

When Do You Need to Pay CGT?

Whenever you sell a taxable asset and make a gain, Capital Gains Tax will apply. Making a gain means receiving more for the asset than you paid. There are a few exceptions to CGT.

You must declare CGT on your second home within 60 days of selling it and making a gain.

If you are going to include Capital Gains Tax within your annual tax return, 31 January is the online deadline. Whereas 31 October is the deadline for paper tax.

Selling a residential property is an exception in this case. You should it report it within 60 days.

You should submit by 31 December in the year after you made gains if you are using the HMRC real-time CGT service to pay. In case there are any cryptocurrency gains, you need to pay CGT on them as well.

Do You Need to Pay Capital Gains Tax on Inherited Property?

Unfortunately, you must pay CGT on inherited property when you sell it. The reason for this is that this property is not your principal residence. Moreover, you need to go through probate, place the property on the market, and then it will sell. As a result, there is a rise in the value of property.

There are ways to reduce the amount of capital gains tax you must pay on property you inherit. For instance:

• Fees for real estate agents.
• Legal expenses.
• The price of advertising to attract a buyer.
• Fees charged by the auctioneer (if you sell via auction).
• The price of any upgrade work, such as an addition or an extension. This does not include costs of upkeep, such as decorating,
• Surveyor expenses.

The amount of CGT you owe depends on the profit you make, how much your income is, and what you can deduct from your total gain.

How to Reduce Capital Gains Tax on Inherited Property in the UK

Following are the exemptions and allowances you can use to reduce or eliminate your CGT liability on an inherited property:

1. Annual Exemption

An annual CGT exemption threshold exists for everyone. For the 2023/2024 tax year, the annual exemption is £6,000 as of August 2023. For trusts, it is £3,000. Thus, the initial £6,000 of capital gains you make in a tax year are exempt from Capital Gains Tax.

2. Spouse Exemption

The beneficiary can decide to share their portion of the inherited property with their spouse before the sale. This means before the exchange of contracts takes place. No Capital Gains Tax is applicable on the transfer to the spouse. It is exempt from it. Therefore, it is possible to use additional CGT annual exemptions.

3. Principal Private Residence Relief

Only your main residence can qualify for this relief. It applies to a gain that you make on the disposal of interest in your primary residence. Through this relief, you can reduce or eliminate Capital Gains Tax. This is on the proportion of tine the late owner owned the property and the time the beneficiary resided in it as their principal residence. Thus, you should know if you must pay capital gains tax on inherited property.

4. Charity Exemption

Capital Gains Tax does not apply when a charity sells assets. Or if someone sell those assets on behalf of the charity. Nevertheless, you owe CGT on any gains you made when selling an asset to a charity. Thus, prior to a property’s sale, personal representatives may assign all or part of an interest to a charity. This happens before the exchange of contracts takes place. The purpose is to avoid a charge of CGT occurring on the estate.

5. Permissible Losses

You also have the option to report to HMRC any losses on a chargeable asset. By doing so you will reduce your total taxable gain in the relevant tax year. It is possible to deduce this loss from the gains you made in the same tax year. You can deduct losses from previous tax years that you did not use if your total taxable gains are more than the tax-free allowance. If this results in your gains reducing to the tax-free allowance, you can carry forward the remainder of the losses.

How Long Do You Need to Live in an Inherited Property to Qualify for PPR Relief?

Please note that the Principal Private Residence Relief applies to a property that is your primary residence. As a result, you do not have to pay CGT when you sell the house.

You need to show that the property has been your principal residence to qualify for PPR relief. Following are the criteria that you must meet:

• Throughout the duration of your ownership, you lived at the property.
• You were never absent from the property for a persistently long time.

The ownership period starts on the date you first purchase the property. It ends once you sell it or dispose of it. The last 9 months of your ownership are always eligible for the relief. It does not matter how you use the property. The only crucial factor is that at any point in time it was your only or primary residence. This period extends up to 36 months for people living in a care home or if they have disabilities. Therefore, you must know if you owe capital gains tax on inherited property.

When the Property was not Always Your Primary Residence

You need to split any gains you make proportionally if the property in question was not always your principal residence. In this case, you need to multiply the gain by a fraction equal to the periods of occupation. This way you can find out the proportion of the gain which qualifies for the relief. The periods of occupation are inclusive of the last 9 months of your ownership.

When You Own Multiple Properties

In case you are the owner of more than property, you must nominate which one is your principal residence. There is a time limit for this nomination. It must take place within 2 years of the date on which you initially became the owners of both properties. If you fail to nominate your property, then the facts of the matter will determine your primary residence.

There are certain scenarios where you cannot occupy the new property when you buy it. Suppose you need to refurbish your new property. In this situation you can consider the initial 24 months of ownership as if the property is your primary residence. The same applies in a scenario where you cannot seem to sell your old property. Hence, it is crucial to know if you need to pay capital gains tax on inherited property.

What is the Difference Between CGT and IHT on Inherited Property?

You may wonder why you must pay CGT on an inherited property when you already paid tax on it.

To clarify, you must pay inheritance tax when you inherit a property. That is why people are confused. They are two different taxes with which you must deal.

How much IHT do you have to pay on the property you inherit? Well, you owe tax on the value of deceased estate over £325,000 at a rate of 40%. Savings, shares, and other assets are part of the estate along with the property.

In comparison to IHT, CGT is only applicable if you decide to sell the property. It is not mandatory simply when inheriting the property. This is the main difference between the two taxes.

The time limit for paying IHT is 6 months within the passing away of the owner and the arrangement of the will by the executor. Until you pay IHT, the assets from the estate will not go into the rightful hands. If you fail to pay within those 6 months, then interest will apply on the amount of tax you owe.

Whereas you will only pay CGT when you sell the property. Moreover, CGT only applies to the profit you make from the sale. Usually, house prices rise. You need to go through probate and then place the property on the market. By the time someone purchases it, you will make a profit. As a result, you will end up paying a hefty tax. Now, you understand how capital gains tax on inherited property works.

Conclusion

To summarise, when you inherit a property, you must pay inheritance tax. If you decide to sell the inherited property, then you also need to pay Capital Gains Tax. Fortunately, there is an allowance of £6,000. Moreover, there are ways to reduce or eliminate CGT when selling your property. Make sure you understand all the tax implications of an inheriting a property in the UK. Not only this, but the importance of reporting it to HMRC. If you fail to do so, you can face a fine greater than your tax bill. Therefore, it is crucial to understand how CGT works in case of an inherited property.

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