What Tax Do You Pay on Inherited Property?

This article will walk you through the basics of property inheritance, including Inheritance Tax, and how property tax works if you keep, sell, or rent out the inherited property.

Do I Pay Tax on Inherited Property?

You won’t usually have to pay any Stamp Duty or tax upon inheriting property, unless you’ve received more than £325,000 worth of non-exempted gifts from the deceased in the 7 years prior to their death. So, if you were gifted property by the deceased before they died, you may be responsible for paying an Inheritance Tax charged on a “tapering relief” scale:

Years between gift and death Tax due
0 - 3 40%
3 - 4 32%
4 - 5 24%
5 - 6 16%
6 - 7 8%
7 + 0%

 

While Inheritance Tax is usually paid by the deceased’s estate, the Inheritance Tax on gifts is paid by the beneficiary. After 7 years gifts are no longer considered in the value of the deceased’s estate.

Other possible exceptions include:

  • Income Tax:

    If the deceased owed Income Tax or was due for a refund, you may have to ensure that the correct amount was paid. You may also owe Income Tax on profit you earn from share dividends or from inheriting an asset that generates income, such as a rental property.

  • Capital Gains Tax:

    You may need to pay Capital Gains Tax if you sell a property or shares of a property you’ve inherited, especially if the property’s value increases during probate.

  • Inheritance Tax:

    If the property is valued above £325,000 and left to someone other than a civil partner, charity, or community amateur sports club, the estate may owe Inheritance Tax.

  • Properties Held in Trust:

    If you are the trustee holding a property in trust or the beneficiary of a “bare trust” you’re responsible for paying tax on the income the trust receives.

What is Inheritance Tax?

When someone passes away, an Inheritance Tax is levied on the estate (the property, money, and possessions) left behind. While the beneficiary does not normally pay this Inheritance Tax, you may be charged if the deceased’s estate cannot or will not pay it. Inheritance Tax is charged at 40%.

If your inheritance includes farmland or woodland, call the Inheritance Tax and probate hotline.

When Do I Not Have to Pay Inheritance Tax?

Normally Inheritance Tax isn’t paid by the beneficiary, but is levied against the deceased’s estate. However, there will be no Inheritance Tax charged on the estate if:

  • The value of the estate is less than £325,000.

  • Everything was left to a spouse, civil partner, charity, or community amateur sports club.

The Inheritance Tax rate may also be reduced to 36% if 10% or more of the net value of the deceased’s estate was left to charity. There are also some Inheritance Tax reliefs available, such as Business Relief, which may allow certain assets to be exempt from Inheritance Tax.

How Do I Report Income From Inherited Property?

If the deceased owned rental property or if their business earned income after their death, this income belongs to their estate. The executor needs to report this income to HMRC as part of probate.

If the deceased owns foreign rental property or rental property in the UK, you may also need to complete a tax return for their estate. You should inform HMRC of this untaxed income.

What Happens to Joint Property?

If you and the deceased owned property together, you’re considered to be “joint tenants” (or “joint owners” in Scotland). Upon their passing, you’ll inherit anything you owned as joint tenants.

However, if you each owned only part of the property, you’re considered to be “tenants in common” (or “common owners” in Scotland, or “coparceners” in Northern Ireland). How the property shares are divided in this case will depend upon your agreement and will usually be handled by the executor.

When a property owner dies, make sure you inform the Land Registry.

Should I Sell Inherited Property?

What you do with your inheritance is up to you, but if you’ve inherited a property and you now have two homes, you’ll need to nominate one of them as your main home within two years of inheriting it.

If you choose to sell the property and it isn’t your main home, you may have to pay Capital Gains Tax. If you choose to rent out your inherited property, you may have to pay tax on the rental income.

Whatever you decide, you should tell HMRC which property is your main home.

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