When someone inherits a home in the UK, it can have capital gains tax implications that need to be considered. Here is an overview of the capital gains tax position when inheriting residential property in the UK:

What is Capital Gains Tax?

Capital gains tax (CGT) is a tax charged on the profit made when you sell or ‘dispose of’ something, an ‘asset’ that has increased in value. It applies to personal possessions worth £6,000 or more, property, shares and other investments. The current CGT rates are 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers.

CGT is charged on the increase in the asset’s value, not its total value. For example, if you inherit a house worth £250,000 and later sell it for £300,000, capital gains tax only applies to the £50,000 increase in value.

Inheriting a Home and Private Residence Relief

When you inherit a home, you also inherit what is known as the ‘base cost’ of the property. This is normally the market value of the property at the time of the previous owner’s death.

If you sell the inherited home without moving into it, you will have to pay CGT on any gain in value since the person’s death. However, if you move into the property and use it as your main residence, you can claim Private Residence Relief. This means you won’t pay CGT on any gains accrued when you lived there.

You can also get Lettings Relief of up to £40,000 if you move out and rent the property out before the sale.

Inheriting and Selling Additional Properties

The capital gains tax rules differ if you inherit additional properties, such as a buy-to-let flat or holiday home. The base cost is still the market value at the time of death, but you won’t qualify for Private Residence Relief as you aren’t living in the property.

This means if you inherit and then sell an additional property, you will pay CGT at 18% or 28% on any gain in value from the time of death to the point of sale.

Principal Private Residence (PPR) Elections

Sometimes, you may inherit two or more properties and want to designate one as your main residence for CGT purposes. It is possible to do this through a Principal Private Residence (PPR) election within two years of the person’s death.

This allows you to choose which property is your main residence from the date of death onwards. You can then claim Private Residence Relief on this chosen property. Without a PPR election, the default position is that no Private Residence Relief is available.

Inheriting Overseas Property

If you inherit residential property outside the UK, you won’t pay UK capital gains tax when you sell it. This is because UK CGT only applies to gains made on disposing of UK residential property.

However, you may be liable to pay capital gains tax or relevant taxes in the country where the overseas property is located. Local tax rules will apply, so that professional advice may be needed.

Reporting and Paying CGT When Selling an Inherited Property

When you sell an inherited property that is liable for CGT, you will need to report and pay the tax to HMRC. This needs to be done within 60 days of completion of the property sale through a Capital Gains Tax on the UK property account.

You will need details of the property sale price, allowable costs and deductions, the property valuation at inheritance, and any tax reliefs claimed. Once submitted, any CGT owed must be paid within the 60-day reporting window. Failing to report inherited property CGT can lead to financial penalties. So, it is important to understand your tax obligations and seek professional advice if needed.

Professional Help with Inherited Property Tax : Given the complex rules around capital gains tax and inherited property, it is advisable to seek professional tax advice if you have inherited a residential property. Our tax advisors can review your specific circumstances, calculate any tax due and ensure you meet all CGT reporting requirements. They can also advise you on minimising inherited property tax liability through available reliefs and exemptions. Professional tax help can give you peace of mind that you are correctly handling capital gains tax on an inherited home. This will avoid any unexpected or costly tax bills down the line.