Inheriting property can be a bittersweet experience. On the one hand, you’ve received a valuable asset that could enhance your financial stability or provide a place to call home. On the other hand, you might wonder about the potential tax implications associated with this windfall.
One of the key concerns many people have is whether they need to pay Capital Gains Tax on an inherited home or property. In this blog, we’ll explore the complexities of capital gains tax in the UK when it comes to inherited property. Read on to learn more.
Understanding Capital Gains Tax (CGT)
You may be wondering when you need to pay Capital Gains Tax and why. However, before we dive into the specifics of Capital Gains Tax on inherited property, it’s essential to have a clear understanding of what CGT is. Capital Gains Tax is a tax levied on the profit made from selling or disposing of an asset that has increased in value since the time it was acquired.
It’s crucial to note that CGT is typically applicable to assets like real estate, stocks, and other investments rather than regular income or property you use as your primary residence, which may be subject to a different tax regime.
Exemptions for Principal Private Residence
In the UK, one of the most significant exemptions from Capital Gains Tax applies to your principal private residence, also known as your primary home.
If you sell your main home, you are generally exempt from paying Capital Gains Tax on any profit made from the sale, provided that you have lived in the property throughout your ownership.
However, it’s worth noting that you may still be liable for CGT if you have used part of the property for business purposes or have a particularly extensive piece of land.
Inheriting a Property: The Basics
When you inherit a property in the UK, you are not immediately liable for Capital Gains Tax on the inherited property.
Instead, the tax implications come into play when you decide to sell or dispose of the property. While you hold the inherited property, it is not considered a taxable event in itself.
Valuation at the Date of Inheritance
The initial step in determining any potential Capital Gains Tax liability on inherited property is to establish its value at the date of inheritance. This valuation, known as the “probate value,” serves as the starting point for calculating any future Capital Gains Tax.
It’s essential to have a professional property appraisal or valuation at the time of inheritance to establish this probate value accurately. This valuation should be carried out by a qualified surveyor or valuer who is experienced in this field.
Principal Private Residence Relief
If the inherited property was the principal private residence of the deceased, it may qualify for principal private residence relief. The conditions for principal private residence relief are as follows:
- The property was the deceased’s primary residence at the time of their death.
- It has not been used for business purposes.
- It has not been let out during the administration of the estate.
This relief is particularly beneficial as it could entirely exempt the property from Capital Gains Tax when you decide to sell it, provided that the conditions are met.
In some cases, you may have inherited a property that was not the principal private residence of the deceased. If you decide to let out the property before selling it, you could be eligible for letting relief.
This relief can further reduce your Capital Gains Tax liability. The amount of letting relief you can claim is the lowest of the amount of Private Residence Relief you’re eligible for or the same amount as the chargeable gain made from letting the property.
It’s important to note that letting relief is not available if the property was the deceased’s primary residence.
Annual Exemption and Tax Rates
If you do not qualify for Principal Private Residence Relief or letting relief, you may be subject to Capital Gains Tax when you sell the inherited property. The rate at which you are taxed depends on your overall income and the profit made from the sale.
You should also be aware of the annual exempt amount, which is the amount of Capital Gains Tax that you can make in a tax year before being liable for CGT.
Offsetting Costs and Improvements
To determine the taxable gain, you can subtract certain allowable costs from the sale proceeds. These costs may include solicitor’s and estate agent’s fees, costs of improvement works made to the property and costs associated with the buying and selling process, such as stamp duty.
Keep detailed records of all expenses related to the property, as they can significantly reduce your Capital Gains Tax liability.
Contact LJS Accounting to Find Out More!
Navigating the complexities of Capital Gains Tax on inherited property can be daunting, and the tax rules may change over time.
It’s essential to seek professional advice from a tax specialist or accountant who can offer you guidance through the process and help you understand your specific tax obligations.
Here at LJS Accounting Services, we offer personal tax services and landlord and property advice. Whether you have just purchased a property or you already have an existing portfolio, our tax experts can help.
We work by making sure you pay the most efficient amount of tax on your property no matter what type it is. We work by providing you with the freedom you need to balance everything while increasing your profit margins.
For more information on the services we offer or to speak to a member of our team, don’t hesitate to contact us today. We are more than happy to help!