Do You Pay Capital Gains Tax on Inherited Property?
Inheriting property from a late family member involves both emotional and financial considerations. Understanding how Capital Gains Tax (CGT) applies to inherited property can help beneficiaries manage their tax liabilities effectively.
Capital Gains Tax (CGT) is a tax on the profit made when you sell or dispose of an asset that has increased in value. This tax is only paid on the gain you make, not the total amount you receive. For those who inherit property, understanding how CGT applies is crucial to managing potential tax liabilities effectively. This article will guide you through the specifics of paying CGT on inherited property in the UK, including strategies to potentially avoid or reduce this tax.
What is Capital Gains Tax on Inherited Property?
When you inherit a property, you don’t immediately have to pay CGT. However, if you decide to sell the inherited property at a later date, CGT may be applicable on the profit you make from the sale. The profit, or gain, is calculated based on the difference between the property’s value at the time of inheritance (known as the probate value) and its value at the time of sale.
How to Calculate Capital Gains Tax on Inherited Property
Determine the Probate Value: This is the market value of the property at the time of the original owner's death.
Sale Price: The amount you receive from selling the property.
Calculate the Gain: Subtract the probate value from the sale price to determine your capital gain.
For example, if you inherit a property valued at £200,000 and later sell it for £250,000, your capital gain would be £50,000.
Capital Gains Tax Rates
The rate at which you pay CGT on the sale of an inherited property depends on your total taxable income. As of the 2023/24 tax year, the rates are:
Basic Rate Taxpayers: 18%
Higher and Additional Rate Taxpayers: 28%
Allowable Deductions and Reliefs
To reduce the amount of CGT payable, you can deduct certain allowable expenses and reliefs:
Annual Exemption: Every individual has an annual CGT exemption (£12,300 for the 2023/24 tax year). This means the first £12,300 of your gain is tax-free.
Costs of Sale and Improvement: You can deduct costs associated with selling the property, such as estate agent and solicitor fees, as well as costs of significant improvements (not maintenance).
How to Avoid Capital Gains Tax on Inherited Property
Principal Private Residence Relief: If the inherited property becomes your main home, you may qualify for Principal Private Residence Relief, which can exempt you from paying CGT on its sale.
Transferring Ownership: Gifting the property to your spouse or civil partner before selling can help reduce the CGT liability, as transfers between spouses are tax-free.
Using Trusts: Placing the property in a trust can be a way to manage and potentially reduce CGT liabilities. However, this is complex and requires professional advice.
Hold the Property: If the property is held as part of your estate until death, it will not incur CGT, as assets are revalued at the date of death for inheritance tax purposes.
Conclusion
Paying Capital Gains Tax on inherited property can be complex, but understanding the rules and available reliefs can help manage and potentially reduce your tax liability. If you are dealing with an inherited property, it is advisable to consult with a tax professional to navigate the specifics of your situation and explore strategies to minimise CGT. By staying informed and proactive, you can make more informed decisions about your inherited property.
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