Inheriting property can be both a blessing and a responsibility. While it's a significant asset that can provide financial security and stability, it also comes with tax implications that need to be understood and navigated. One such tax consideration is Capital Gains Tax (CGT) on inherited property in the United Kingdom (UK).
In this article, we'll delve into the intricacies of CGT on inherited property, exploring how it works and what individuals need to know to manage their tax liabilities effectively.
Capital Gains Tax (CGT)
Before delving into tax implications related to the topic, it is worth introducing capital gains tax. Capital Gains Tax is the tax levied on the profit made when you dispose of chargeable assets that have increased in value compared to when you purchased them.
To learn more about Capital Gains Tax, please refer to our article on, "Capital Gains Tax: A Complete Guide"
CGT: While inheriting property
Firstly, it's important to understand the basic rule relevant to this: "There is no immediate CGT when you inherit the property. But there can be CGT when you dispose of the inherited property."
CGT: While disposing of the inherited property
When you dispose of an inherited property, and its value has increased from the time you inherited it to the time you sell it, CGT becomes relevant. You may need to pay the capital gains tax based on the taxable gains arising from the disposal of the property.
Probate Value
The probate value, sometimes referred to as the market value of the property at the deceased's death, is essentially important in determining the CGT due. When you sell the inherited property, this probate value is used as the base cost for calculating capital gains.
Calculating Gain
The amount of CGT will depend on the amount of gain and the tax rate. The residential property gain is charged at either 18% or 24%, depending on the taxpayer's taxable income for the disposal tax year.
For Example
On 26 January 2004, George purchased a residential property for £80,000. He died on 18 September 2021, and his son, Jeff, inherited the property. On that date, the property had a market value of £420,000 (probate value). Here, the property has been disposed of, but the transfer of property on death is an exempt disposal, so there will be no CGT due while inheriting the property.
However, when Jeff sold the property on 20 March 2025 (Tax Year 2024/25) for £520,000, he had to pay CGT as the value had increased from the time he inherited it to the time he sold it. When he sold the property, the base cost for the property will be £420,000. So, Taxable Gains will be calculated as,
Sales Proceeds | £520,000 |
Less: Base Cost (Probate Value) | (£420,000) |
Net Chargeable Gains | £100,000 |
Less: Annual Exempt Amount (AEA) | (£3,000) |
Taxable Gains | £97,000 |
The rate applicable for this property, assuming Jeff is a higher-rate taxpayer, is 24%. So, Jeff's Capital Gains Tax Liability will be £23,280 (£97,000*24%).
Filing and Payment Deadline
The disposal of inherited residential property has to be filed, and payment must be made within 60 days of the date of completion of the sale. So, the filing and payment deadline for Jeff will be 19 May 2025.
Exemptions and Reliefs on Inherited Property
Looking at the above example, Jeff is liable to pay capital gains tax. However, several reliefs are available, with certain criteria (which need to be met) to reduce the capital gains tax.
Spouse Exemption
If you have inherited the property and wish to sell it or transfer it to your spouse, the CGT liability will not arise as it would classify as no gain/no loss.
Private Residence Relief (PRR)
If you have inherited property and you lived in it as your main residence at some point during your ownership, you can claim PRR.
This relief can significantly reduce your CGT liability when you sell the inherited property. However, the relief may be restricted if the property was not your main residence for the entire period of ownership.
For more guidance on PRR, refer to Private Residence Relief (PRR) - A Complete Guide.
Lettings Relief
Suppose you have inherited property and you lived in it as your main residence at some point, and you also let out some part of it. In that case, you might be eligible for this relief. This relief is claimed in addition to PRR, which can further reduce the CGT liability.
For additional information on PRR, consult the guide on, "Lettings Relief: How to Lower Your CGT Bill, available from HMRC".
Conclusion
In conclusion, Capital Gains Tax (CGT) on inherited property in the United Kingdom presents significant financial considerations for beneficiaries. While there's no immediate CGT upon inheritance, it becomes applicable upon the sale of the property, calculated based on the probate value at the time of inheritance. Understanding the various reliefs and exemptions available, such as Spouse
Exemption, Private Residence Relief (PRR), and Lettings Relief, is crucial for effectively managing CGT liabilities. Given the complexity of tax laws surrounding inherited property, seeking professional advice from a qualified tax advisor is strongly recommended to ensure compliance and optimise tax outcomes.
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