Inheriting a property after the death of a family member or loved one is always a trying time and hopefully, there is an estate agent available to help you with any questions you have. Nevertheless, there are legalities and administrative situations that must be addressed by the beneficiary of an inheritance. One of these is Inheritance Tax.
Is There a Tax on Inherited Property?
Inheritance tax is applicable to the entire estate of a deceased family member or loved one, including any property. Inheritance tax is set at a basic rate of 40% on everything above the threshold limit of £325,000.
Any property that is inherited is evaluated at the time of death and its value is added to that’s persons total estate value.
Am I Obligated to Pay Inheritance Tax?
Absolutely. Unless you happen to qualify under the few exemptions that would make you exempt from inheritance tax, you are required to pay by the end of the 6th month after the person has died. As an example, if a person died in August, the inheritance tax would be due by the end of February.
Am I Required to Pay Capital Gains Tax on Residential Property That is Inherited?
Capital gains tax is not a tax that is applicable to the process of inheriting a home or property. However, if you choose to sell a home that you have inherited, you will be obligated to pay any capital gains tax on that inherited property, if you have made a profit on the sale of that home or property. This doesn’t apply if the inherited home is used as your main residence.
What if I Am Selling the Property?
If at the time of inheritance, the home is evaluated at £300,000 and you then decide to sell it for £350,000, you will owe capital gains tax on £50,000. Your capital gains rate is determined by your income in that tax year and whether you are a basic, higher, or additional-rate taxpayer.
Capital gains for those in the basic tax rate is 18% on residential property and 28% for those who are in the higher or additional tax rate band.
Is it Possible to be Exempt from Inheritance Tax?
After a lifetime of hard work and sacrifice from their deceased family member, many families loathe to hand over any more of their estate to the government than is necessary. There are a few circumstances that qualify you as exempt from inheritance tax in the UK. What are those circumstances?
- Estate is Left Solely to Spouse/Partner
If an estate is left in its entirety to a spouse or partner, it is not subject to inheritance tax.
- Tax-Free Inheritance is Below the Threshold
The threshold (or nil band) for an estate is £325,000. If the total of the estate is less than £325,000, you are exempt from inheritance tax.
- Trust for Bereaved Minors
If a trust is set up for a bereaved minor (a minor who has lost a parent or stepparent), they will not be required to Inheritance tax as long as the assets are set aside strictly for the bereaved minor and they are fully entitled to those assets by the age of 18.
- Higher Threshold Limit for Children and Grandchildren
If an estate is left to children or grandchildren, the threshold is raised to £500,000.
For those leaving parts of their estate to charity, there will be no inheritance tax levied against the total donated to any charities.
Are There Other Types of Taxable Income from the Inherited Property?
Not all inherited properties are used as a main residence for the deceased. Often, there are rental properties that are passed from one family member to another through a will. These homes or properties, whether they are in a trust or not, still abide by all applicable inheritance tax laws. Any income received by the deceased is property of the estate and must be tabulated in probate.
If there is an inherited property that has rental income, the beneficiary will be required to file that income and pay the required taxes.
Should I Sell an Inherited Property?
This decision belongs to the person who has inherited a property. Regardless of the choice, if you have inherited a home and now have 2 homes, you are required by law to designate one of them as your main residence within 2 years. If you do not do so, the HMRC will decide for you based on the best available data they have.
If you choose to sell the home, be aware of the potential capital gains that you may owe. If you choose to rent, you will be obligated to report the rental income. If you choose to move into the home and use it as your main residence, you may still be required to pay inheritance tax on a portion of the value of the house (if you are not eligible for exemption).
If I Inherit Property, does it Affect my Tax Rate or my Income Tax?
Inheriting a home is not considered “income” therefore it does not affect your tax rate or your income tax. This may change if you decide to sell the home or if you choose to rent it out. Both options will produce “income” that may change your tax obligations.
Inheriting Property in the UK
If you are unsure or have questions about the inheritance process, ask one of our property accountants on 020 7419 6538 or fill in our contact us form. Knowing exactly what does and does not apply can be a somewhat complex process and it is always advisable to reach out if you feel like you need help. The sums of money owed in an inheritance can be large and you want to ensure your tax compliance.