If you inherit property, it can be a great blessing. However, it also comes with some complications, especially when understanding your responsibilities as a UK taxpayer. One common question that arises is: Do I pay Capital Gains Tax (CGT) on inherited property?

In this blog, we explore that topic, providing clarity and guidance on the tax regulations and what action you will need to take if you inherit a property.

Understanding Capital Gains Tax (CGT)

Capital Gains Tax is a levy on the profit (or 'gain') you make when you sell or dispose of an asset that has increased in value. Keep in mind that CGT is charged on the gain, not the total amount you receive from the sale.

Inheritance and Immediate Tax Implications

If you're wondering, 'When do I pay capital gains tax on inherited property?', the good news is that it doesn't apply immediately. You will not be liable for CGT at the point of inheritance. Instead, the deceased's estate may be liable for Inheritance Tax (IHT) if its value exceeds certain thresholds (currently £325,000). 

When Do I Pay Capital Gains Tax on Inherited Property?

You won't need to worry about Capital Gains Tax (CGT) until you sell or gift the inherited property. When this happens, CGT is calculated based on how much the property has increased in value since you inherited it.

During probate (the legal process of handling a deceased person's estate), the property will have been given a market value. If you later sell the property for more than this probate value, the difference (the gain) may be subject to CGT.

In short, if the property's value has increased since you inherited it, you might need to pay CGT on the profit when you sell.

Calculating Your Capital Gains Tax Liability

Here are the basic steps to determining your taxable gain:

1. Establish the Probate Value: This is the property's market value at the date of the deceased's death.
2. Determine the Sale Price: The amount you receive upon selling the property.
3. Subtract Allowable Expenses: Deduct costs, such as legal fees, estate agent fees, and any capital improvements made to the property.
4. Calculate the Gain: Subtract the probate value and allowable expenses from the sale price.

For example:

• Probate value: £200,000
• Sale price: £250,000
• Allowable expenses: £5,000
• Taxable gain: £250,000 - £200,000 - £5,000 = £45,000

Understanding Your Tax Allowance and Rate

You will not have to pay tax on all your capital gains, only those above your tax-free allowance. In the UK, individuals have an annual CGT allowance of £3,000 in the tax year 2024/25.

In the example above, you can, therefore, deduct the allowance of £3,000 from the calculated £45,000 to leave you with a total taxable gain of £42,000. This calculation assumes you have not used your allowance elsewhere for other capital gains.

When it comes to the rate of tax applied in 2024/25, there are two CGT rates on residential property: 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers.

It is essential to stay informed about recent tax changes. In the October 2024 Budget, annual tax allowances were reduced, and the higher rate of CGT was increased, highlighting the importance of timely and strategic financial planning.

Reporting and Paying CGT

If you sell an inherited property and make a taxable gain, you must report and pay the CGT to HM Revenue & Customs (HMRC) within 60 days of the sale completion. This can be done through the HMRC website. In addition, you will need to declare your capital tax gains on a self-assessment tax form.

How to Reduce Your CGT Liability

There are a few ways to reduce your CGT liability legitimately. Make sure you consider the below situations to ensure you are not paying more tax than required.

Utilise your full annual allowance.

If possible, spread the sale of assets over multiple tax years to take advantage of your annual CGT allowance each year.

Report capital losses.

If you have made any losses when selling property, shares or any other chargeable assets, these can offset your taxable gains. Furthermore, if they are not used this year, capital losses can be carried forward indefinitely for future tax years as long as they have been formally registered with HMRC at the time.

Transfer to a spouse or civil partner.

If you make a transfer to your spouse or civil partner, it will be exempt from CGT and can allow you both to take advantage of your tax allowances at the time of sale.

Principal Private Residence Relief (PPRR)

If you move into the inherited property and it becomes your primary residence, you may qualify for relief that can reduce or eliminate the CGT when you sell.

Seeking Professional Advice

Tax laws can be intricate and subject to change. Therefore, it's advisable to consult with a tax professional or accountant to receive personalised advice based on your circumstances. At Keith Graham Chartered Accountants, our experienced team can help you ensure compliance with current regulations and identify opportunities to minimise your tax liability.

If you have any questions about Capital Gains Tax on inherited properties, please get in touch with our team.