CGT when selling inherited property:
what you need to know
When a property is inherited, many people assume that no tax will arise when it is eventually sold. However, this is not always the case.
While there is no Capital Gains Tax at the point of inheritance, a tax charge may arise if the property is later sold for more than its value at the date of death.
Understanding how Capital Gains Tax applies to inherited property can help avoid unexpected tax liabilities and ensure that reporting obligations are met.
Is there Capital Gains Tax when you inherit a property?
There is no Capital Gains Tax when a property is inherited.
Instead, the property is treated as being acquired at its market value at the date of death. This value is often referred to as the probate value.
This means that any future Capital Gains Tax is based on the difference between:
the probate value, and
the eventual sale price.
When Capital Gains Tax may arise
Capital Gains Tax may arise if the property increases in value between the date of death and the date it is sold.
For example:
value at date of death: £300,000
sale price: £340,000
In this case, there may be a gain of £40,000.
This situation commonly arises where:
there is a delay in selling the property
property prices increase during the administration period
improvements are made before the sale
Who is responsible for the tax?
The tax position depends on who sells the property.
If the property is sold by:
Executors (during estate administration)
The gain belongs to the estate, and the executors are responsible for:
calculating the gain
reporting it to HMRC where required
paying any tax due from the estate
Beneficiaries (after the property is transferred)
If the property has already been transferred to a beneficiary, the gain belongs to the individual beneficiary.
In this case, the beneficiary is responsible for reporting the gain and paying any tax due.
Capital Gains Tax allowances
Both estates and individuals may be entitled to a Capital Gains Tax annual allowance.
This allowance can reduce the taxable gain.
However, for estates, the allowance is only available for a limited period following death. After this, no allowance may be available, which can increase the tax payable.
The availability of allowances should therefore be considered when deciding when to sell the property.
The 60-day reporting rule
Where a taxable gain arises on the sale of UK residential property, it may need to be reported to HMRC within 60 days of completion.
This rule applies whether the property is sold by:
executors, or
individuals (including beneficiaries)
The report must include details of the gain and any tax due, which is usually payable at the same time.
Missing the deadline can result in penalties and interest.
Allowable costs
When calculating the gain, certain costs may be deducted.
These can include:
legal fees on sale
estate agent fees
certain improvement costs
These deductions can reduce the taxable gain and therefore the amount of tax payable.
What if the property is occupied?
If a beneficiary moves into the inherited property and uses it as their main residence, relief from Capital Gains Tax may be available for the period of occupation.
This is known as Principal Private Residence relief.
However, this relief only applies to the period during which the property is actually occupied as a main residence. Any earlier period may still be subject to Capital Gains Tax.
Common misunderstandings
There are several common misunderstandings when it comes to inherited property.
These include:
assuming that inherited property is always tax-free
overlooking increases in value during administration
missing the 60-day reporting requirement
assuming the same rules apply to estates and individuals
Understanding how the rules work can help avoid unexpected tax liabilities.
When professional advice may help
The tax position for inherited property can depend on a number of factors.
Advice may be helpful where:
there has been a significant increase in value
the property is sold some time after death
the property has been transferred to beneficiaries
the position is unclear
Obtaining advice before the sale can help ensure that the tax implications are understood.
How we can help
We regularly advise executors and individuals on Capital Gains Tax issues relating to inherited property.
This may include:
calculating capital gains
advising on available reliefs
assisting with HMRC reporting requirements
dealing with HMRC correspondence
If you are considering selling an inherited property and would like guidance on the tax implications, we would be happy to discuss your situation.
