While most people immediately think of cash when it comes to an inheritance, it’s quite common to inherit property instead. This can sometimes cause confusion and problems for the beneficiary. However, it doesn’t have to be a struggle! With a little knowledge and research, inheriting a property can be a straightforward process. Here are some important points to remember if you find yourself in this situation.
Understanding Inheritance Tax (IHT) on Property
You’ve almost certainly heard of ‘inheritance tax’, but do you know what it really entails, especially for property? If you haven’t dealt with it before, your understanding might be slightly off. Since you might need to pay tax when you inherit property, it’s vital to know the facts.
Inheritance tax is not paid by the beneficiary on everything they inherit. It’s specifically a tax on the deceased person’s estate. For property, it’s typically only payable if the property’s value exceeds a certain threshold (currently £325,000 for an individual, though this can change). Anything over this amount is taxed at 40%.
However, there might be nothing to pay at all if the property was jointly owned and then passed to the surviving spouse or civil partner. In such cases, the surviving spouse also inherits their partner’s unused tax-free allowance, potentially pushing the effective inheritance tax threshold up to £650,000. Therefore, not all inherited properties will be subject to this tax. It’s always worth checking with an expert, such as IWC, to confirm your specific situation.
Capital Gains Tax (CGT) When Selling or Renting
Capital Gains Tax is a different type of tax that you, as the beneficiary, will only need to pay if you decide to sell the inherited property. This tax is calculated on the profit made – specifically, the difference between the property’s value when you inherited it and its value when you sell it.
- Selling sooner vs. later: If you plan to sell and house prices are rising, selling sooner might mean less CGT. If prices are falling, holding onto the property longer and selling for less could mean less tax is due, as the ‘gain’ would be smaller.
- Renting the property: If you choose not to sell and instead rent out the inherited property, you will be required to pay tax on any rental profits. The amount you pay will depend on your other income. Becoming a landlord also comes with various legal and financial requirements. Again, speaking to an expert is crucial if you choose this route.
Dealing with a Mortgage on Inherited Property
In some cases, the property you inherit might still have an outstanding mortgage. When this happens, selling the property is often the most straightforward solution, as the lender will still expect repayments. Some lenders, however, may be willing to put a temporary hold on repayments until probate is completed and the property can be put on the market.
It’s possible a life insurance policy held by the deceased could pay off the mortgage. If there’s no such policy, or if it doesn’t cover the full amount, and you wish to keep the property, you will need to take over the repayments. This is subject to the lender’s approval. If you decide to rent out the property, you’ll need to change the terms of the mortgage to a buy-to-let agreement.
Informing HMRC About Your Inherited Property
HMRC (His Majesty’s Revenue and Customs) needs to be informed if you inherit a property, especially if you already own another. You must notify them which property is your primary residence. This crucial declaration needs to be made within two years of inheriting the property. This determines your eligibility for certain tax reliefs, such as Principal Private Residence (PPR) relief if you later sell your main home.