Capital Gains Tax on the sale of an inherited property.

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The tax man likes to get his money somehow, and one of the “easiest” ways is on inherited property. An estate including property, may be passed to beneficiaries without any inheritance tax (IHT) being paid as it depends on the value of the estate, how many children inherited and if there is any spousal transfer before death.  We are not going to go into these reasons in this blog, and we are going to use dummy numbers to illustrate the points being made.

For this post, we will focus specifically on selling an inherited property in the UK and how capital gains tax may apply.

What is Capital Gains Tax?

Capital Gains Tax is a type of tax that you need to pay when you make a profit by selling something valuable, like property, stocks, or even artwork. It’s the Government’s way of collecting a small portion of the money you earn from selling these things.

Let’s imagine that you inherited a property from your father. The value of the property when you got it (called the probate value) was £300,000. However, when you decided to sell it, you found a buyer who was willing to pay £375,000. That’s great news because, on the face of it, you made a profit of £75,000!

When you do this, there is no tax for the person who passed away to pay. The estate was mopped up, inheritance tax paid (if applicable) and the property was passed to the beneficiaries. It is the person selling that property that will have the tax to pay as in effect this is a second property for the person and you are not selling your principle private residence as you have your own home that you live in.

How is Capital Gains Tax Worked Out?

In order to calculate the gain, you take the profit, less the personal allowance for capital gains (for 2023/2024 it has gone down from £12300 to £6000) and you then get a taxable gain of £69000. If there are two people selling the property, then the £69,000 will be divided by two. But let’s assume it is a single person.

Now the amount of tax to pay is based on a percentage, which is either 18% if you are a basic rate taxpayer, or 28% if you are a higher rate taxpayer. For ease, let’s assume that your income (from PAYE, Self Employment etc.) is over £50270, you will have to pay 28% on the £69,000 gain, so handing over to the tax man £19320.  You will therefore walk away with £355,680 in your bank account.

Add in a sprinkle of complication

Now we can put in a few complications.   If you inherited the property 3 years ago and did not live in it but say rented it out, and then you go and live in it as your principle private residence for a year, assuming the same gain of £69000, as you have live in it for 12 months out of 48, the gain then drops to £51750 which gives a tax bill of £14490.

Should you then move out whilst you try to sell it, the fact that you have lived in it, you can be given a maximum 9-month grace period which counts towards the number of months living it. If it only takes a month to sell after you move out, you only get 1 month grace period.

Registering Capital Gains Tax

Now the final thing you need to know about is that once the sale has been completed, you need to register the capital gain at HMRC and pay over the gain within 60 days of completion, so make sure when you start the sale process, you have all your ducks in a row with regards probate value, improvement costs, sales costs like estate agent fee etc as those 60 days pass by really quickly.

Here is how you report the gain>>

Always check with an accountant or tax advisor about the potential sale and taxes to pay as you may be planning something in the future and some small adjustments can change the outcome of tax on the sale.

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