How to Avoid Capital Gains Tax on Inherited Property UK

Inheriting property doesn’t automatically trigger Capital Gains Tax (CGT), but it can become an issue if and when you decide to sell it. Many people assume that inheritance tax is the only concern when receiving property from a deceased relative. However, if the property has increased in value by the time you sell it, you may owe CGT on the profit.

This guide explains when CGT applies to inherited property, how it's calculated, and what you can do to minimise or avoid it.

What Is Capital Gains Tax (CGT)?

Capital Gains Tax is a tax on the profit made when you sell or dispose of an asset that’s increased in value. In the context of property, CGT is usually due when you sell a second home, rental property, or inherited home that is not your main residence.

In the 2024–25 tax year, the CGT allowance for individuals is £3,000. Anything above this is taxed at either:

• 18% for basic rate taxpayers on residential property

• 24% for higher or additional rate taxpayers

Different rules apply for other assets, but property carries its own rates due to its potential for high gains.

Do You Pay CGT When You Inherit Property?

No, you do not pay Capital Gains Tax at the time you inherit property. At the point of inheritance, the property is valued for Inheritance Tax (IHT) purposes, and that valuation becomes your base cost for CGT calculations.

You only pay CGT if you later sell or dispose of the property and it has risen in value since you inherited it.

When Is CGT Due on Inherited Property?

CGT becomes due when you sell or give away the inherited property and its market value has increased since the date of inheritance. If you rent out the property, you won’t owe CGT unless and until you sell it.

The tax applies to the gain, not the full sale value. The gain is the difference between the sale price and the market value at the time of inheritance.

Key Scenarios Where CGT Applies

• You inherit a house worth £250,000 and sell it later for £300,000. The £50,000 gain is potentially subject to CGT.

• You inherit a flat and decide to let it out as a rental, then sell it five years later at a profit.

• You give the property to someone else (other than a spouse or civil partner), and HMRC treats this as a disposal for CGT purposes.

If you live in the inherited property and make it your main residence, you may be able to reduce or eliminate the CGT liability.

How Is CGT on Inherited Property Calculated?

Step 1: Determine the probate value – the property’s market value on the date of inheritance.
Step 2: Calculate the sale price when you dispose of the property.
Step 3: Subtract the probate value from the sale price to find the gain.
Step 4: Deduct your annual CGT allowance (£3,000 for 2024–25).
Step 5: Apply the correct CGT rate based on your income tax band.

You may also deduct allowable costs such as legal fees, estate agent fees, and certain home improvements made after you inherited the property.

What About Capital Losses?

If you sell the property for less than its probate value, you may be able to claim a capital loss. This can be used to offset gains made on other disposals, reducing your overall CGT bill. Losses can also be carried forward to future tax years.

Do Primary Residence Exemptions Apply?

Yes, but only if you genuinely live in the property and it qualifies as your main residence. In this case, you may be able to claim Private Residence Relief, which can reduce or eliminate your CGT liability.

The longer you live in the property as your main home, the more of the gain you can shelter from tax. If you move in shortly after inheriting it and live there for several years, this strategy can significantly reduce your future tax bill.

Minimising CGT on Inherited Property

There are several strategies you can use to reduce or avoid CGT:

• Move into the inherited property and make it your main residence

• Time the sale to fall within a tax year when your income is lower (as CGT rates depend on your income tax band)

• Share ownership with a spouse to double the CGT allowance

• Offset any capital losses from other disposals

• Gift the property to a spouse or civil partner, which is exempt from CGT

• Use property improvements and sale costs to reduce the taxable gain

• Consult a tax adviser early for tailored strategies

What Is the Capital Gains Tax Allowance?

For the 2024–25 tax year, each individual has a £3,000 CGT allowance. If you own the property jointly with someone else, each person gets their own allowance.

If your total gain on all chargeable assets in a tax year is below this amount, you won’t have to pay CGT. If the gain exceeds the threshold, only the amount above the allowance is taxable.

When Is the Capital Gains Tax Deadline?

If you sell a UK residential property and CGT is due, you must report and pay the tax to HMRC within 60 days of completion. You can do this through the HMRC online system.

Failing to meet this deadline can result in interest charges and penalties.

Final Thoughts

Capital Gains Tax on inherited property can significantly reduce your profit if not managed carefully. The key is understanding when CGT applies, how it’s calculated, and what steps you can take to reduce or avoid it.

Using available reliefs, planning the timing of a sale, and seeking expert tax advice early can make a major difference in how much tax you end up paying. If you're unsure about your position, speak to a tax adviser or solicitor with experience in estate and property planning.