It is challenging and painful to inherit property from a deceased family member. Not to mention it frequently has both an emotional and financial cost. Beneficiaries of an estate receiving an interest in real estate need to understand the nuances of capital gains tax (CGT) to manage their tax responsibilities and make informed decisions. This guide will cover everything you need to know about who pays capital gains tax on a deceased estate.

First, let us discuss the definition of capital gains tax. Then, we can move on to how it applies to an inherited property and who is liable to pay it.

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 place on the profit you make. Which is the increase in the sale’s value price compared 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 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 the 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 cannot provide accurate reports to HMRC, you will end up facing a fine that is more than your tax bill. Therefore, notifying HMRC is crucial.

What are the Capital Gains Tax Rates for 2024/25?

It is important to note that CGT rates differ from income tax rates. Two broad brackets exist in the 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.

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 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.

How Much is the CGT Allowance for 2024/25?

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? A reduction is taking place in the tax year 2024/25, as it is going down from £6,000 to £3,000 for individuals. This means that you can make a profit of up to £3,000 before CGT begins to apply.

Is an Inherited Property Subject to Capital Gains Tax?

Now, when does capital gains tax apply to an inherited property? Well, it can apply when the estate sells the property. If a beneficiary acquires it, then they are liable for CGT when they sell it. You owe CGT on the gain you make if the value of the probate property has risen since the person passed away. It does not apply to when the deceased person bought the property.

When Does an Estate Owe CGT?

Any disposal before the passing away of the individual which is not settled determines if an estate is liable for capital gains tax. In case it is there, then the executor must work out the calculations and agree on the amount of tax due with HMRC. This amount is payable from the estate, as it is the estate’s debt.

If they sell property or assets during the executory administration, the estate can become liable for payment of CGT. Nevertheless, there is no CGT due in case legates get the assets through a will. At the date of passing, the assessment of the value takes place. In any future disposal of the value the legatee got the asset for, this figure is going to be assessed. Moreover, the date the legatee gains the assets will be considered as the date of passing away. The typical rules of CGT will apply if the legatee decides to dispose of the asset.

How to Establish Capital Gains Tax Liability

If the deceased individual held any assets, their value on the date of passing away is used to determine whether the estate must pay CGT. The assets are then assumed to have been passed to the executor at that value at the date of passing. This value is also called the acquisition or cost value. To calculate the gain, you use the same method. However, you must use the value at the date of passing instead of the purchase price.

Certainly, all tax affairs are complex matters. Therefore, you must reach out for expert advice from a specialist in estate and CGT.

In case the individual is not a resident of the UK, then CGT will not apply on disposal. Nevertheless, you must confirm this with your professional adviser to ensure you are not under obligation to pay CGT.

Who Pays Capital Gains Tax on a Deceased Estate?

The executors distribute cash to the beneficiaries when they sell the assets, whether some or all. When this happens, they are liable to register the estate with HMRC and report capital gains as they are the ones making any post-death gains or losses.

Executors must complete an online 60-day capital gains tax return concerning any residential property disposals. They need to report any CGT due and pay it within 60 days of the date of completion of the property sale. Furthermore, they need to declare this disposal on any formal estate tax return that was issued.

For the tax 2024//25 tax year, the CGT allowance is £3,000, which the executors can claim fully. Please note that this annual allowance is only available to them in the year of the passing away of the individual and the next two years. If there are any chargeable gains, then CGT will apply to them at a higher rate. For residential properties, it is at 28% for the 2024/25 tax year, whereas for all other assets, it is 20%.

However, tax planning opportunities are possible if before selling the assets, they are transferred to beneficiaries.  Over different tax years, if they stagger the sales of assets, they can claim several annual CGT allowances. Additionally, by using any personal capital losses that they brought forward, they can pay less tax than the executors. They will pay tax at 18% on residential property and 10% on other assets if any of their gains are within the basic rate band.

How to Reduce Capital Gains Tax on Inherited Property

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 2024/2025 tax year, the annual exemption is £3,000. For trusts, it is also £3,000. Thus, the initial £3,000 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 an interest in your primary residence. Through this relief, you can reduce or eliminate Capital Gains Tax. This is in the proportion of time the late owner owned the property and the time the beneficiary resided in it as their principal residence. If it is not your main residence, then it can still qualify as such. Therefore, you should know how long you must live in a property to avoid capital gains tax:

4. Charity Exemption

Capital Gains Tax does not apply when a charity sells assets. Or if someone sells those assets on behalf of the charity. Nevertheless, you owe CGT on any gains you made when selling an asset to a charity. Thus, before 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.

Conclusion

To summarise, the person liable to pay CGT on an inherited property is determined according to the circumstances. In such cases, it is important to understand the tax implications. Luckily, there is an annual capital gains tax allowance you can avail of. Not only this but there are other ways to reduce the amount of CGT you owe on an inherited property. Make sure you know where you stand in case of a deceased estate. In case you are a beneficiary, you may end up paying tax. Nevertheless, you can reduce it and pay less than the executors. Certainly, it is ideal to reach out for expert advice in case of inherited properties and assets.

Recent Posts