Capital gains tax on inherited property

You do not pay Capital Gains Tax simply for inheriting a property. CGT only becomes relevant if you later sell the property for more than its probate value (the market value at the date of death). The act of inheriting is not a taxable event for CGT purposes. However, you may need to consider Inheritance Tax, which is a separate matter dealt with during the probate process. CGT only applies to the gain you make between inheriting and selling.

The amount of CGT you pay depends on the size of the gain and your income tax band. For residential property, the rates are 18% for basic rate taxpayers and 24% for higher rate taxpayers. The gain is calculated as the difference between the sale price and the probate value, minus any allowable deductions such as the annual CGT allowance, selling costs, and the cost of any improvements you made to the property. Your annual CGT allowance can offset part of the gain. A qualified tax adviser can calculate your exact liability.

There are several legitimate ways to reduce or eliminate CGT on inherited property. If the deceased lived in the property as their main home, selling within two years of death may qualify for Private Residence Relief, which can eliminate CGT entirely. You can also use your annual CGT allowance, deduct allowable expenses such as legal fees and improvement costs, and transfer a share to a spouse or civil partner to use their allowance. Selling quickly after inheriting reduces the chance of a large gain building up. Always seek professional tax advice for your specific situation.

Living in an inherited property as your main residence can qualify you for Private Residence Relief (PRR) for the period you live there. PRR exempts the gain attributable to the time the property was your main home. There is no fixed period you must live there - any time spent as your main residence counts. However, HMRC will look at whether the property genuinely was your main home, considering factors like where you are registered to vote, where you receive post, and where your daily life is based. The final period exemption also applies for the last 9 months of ownership regardless of whether you lived there.

The 2 year rule refers to the period after the date of death during which certain reliefs may apply. If the deceased was living in the property as their main residence at the time of death, and the property is sold by the personal representatives within 2 years, the property may qualify for Private Residence Relief. This can significantly reduce or completely eliminate any Capital Gains Tax on the sale. The 2 year window is measured from the date of death, not from when probate was granted. This is one reason why a quick sale can be financially beneficial.

The 36 month rule, also known as the final period exemption, applies when you have lived in a property as your main residence at some point during your ownership. The last 9 months of ownership (previously 36 months, reduced in April 2020) are automatically exempt from CGT, regardless of whether you are living there during that final period. For individuals who are disabled or living in a care home, the final period exemption remains at 36 months. This rule can be valuable when combined with other reliefs to reduce your overall CGT liability.

Capital Gains Tax may apply when you sell an inherited property, but only on the gain made since the date of death. The base cost for CGT purposes is the probate value - the market value of the property at the date of death - not what the deceased originally paid for it. If you sell for more than the probate value, the difference is a taxable gain. If you sell for less than the probate value, you may be able to claim a capital loss. Many inherited properties are sold fairly quickly and close to the probate value, meaning the CGT liability is small or non-existent.

If the property is sold by the personal representatives (executors or administrators) before the estate is distributed, any CGT liability falls on the estate. The personal representatives have their own annual CGT allowance for the tax year of death and the following two tax years. If the property is transferred to a beneficiary and they then sell it, the CGT liability is the beneficiary's personal responsibility. The beneficiary uses their own annual allowance and pays CGT at their personal rate. In either case, the base cost is the probate value at the date of death.