Capital Gains Tax (CGT) is tax on any profit or gain made when you sell or dispose of an asset in a tax year.
You may have to pay Capital Gains Tax on an inherited property if you decide to sell the property and you make a profit on the sale. The rules around Capital Gains Tax on inherited property are complex so seek professional advice if necessary.
In this blog we look at the rules around Capital Gains Tax, how much you may have to pay and ways that you can potentially reduce your CGT bill.
Selling inherited assets
When you inherit an asset (i.e. property or a valuable item) it becomes your property. You wont pay Capital Gains Tax at the point you inherit the asset. However, if you then sell/dispose of that asset at some point in the future, you will potentially be liable for CGT on the profit/gain you make at the point of sale.
If you dispose of an asset you jointly own with someone else, you have to pay CGT on your share of the gain.
What assets do you pay Capital Gains Tax on?
You pay CGT on the gain when you sell (or ‘dispose of’):
- most personal possessions worth £6,000 or more, apart from your car
- property that’s not your main home
- your main home if you’ve let it out, used it for business or it’s very large
- any shares that are not in an ISA or PEP
- business assets
These are known as ‘chargeable assets’.
Personal possessions that you may pay CGT on will include things like:
- coins and stamps
- sets of things, e.g. matching vases or sets of cutlery.
If you sell or give away cryptoassets (like cryptocurrency or bitcoin) you should check if you have to pay Capital Gains Tax.
Depending on the asset, you may be able to reduce any tax you pay by claiming a relief.
Is there Capital Gains Tax to pay on the estate?
The estate of the deceased wont have to pay CGT on the property or assets before or when the person dies. Inheritance tax may have to be paid on the estate if the estate is over a certain value (see below).
However, if the property or asset is sold during probate and its value has increased since the person passed away, there may be Capital Gains Tax to pay from the estate. The amount of Capital Gains Tax that will be due is calculated on how much the increase in value has been since the person’s death.
But I already paid tax!
You may be thinking that when you’ve inherited the property, you/the estate already had to pay inheritance tax so why are you now having to pay CGT?
When someone passes away, their estate may be subject to inheritance tax. The standard rate for inheritance tax is 40%. This only applies to the portion of the estate that is over £325,000. The first £325,000 of the estate will be inheritance tax free.
Capital Gains Tax is very different to inheritance tax and may be payable when someone inherits an asset and then later disposes/sells the asset and makes a profit, unlike inheritance tax which is payable on the value of the deceased estate.
How Capital Gains Tax works during probate
Probate is used to describe the legal and financial processes involved in dealing with the property, money and possessions (the assets) of a person who has died.
Probate is the process of proving that a will is valid (if there is one) and confirming who has authority to administer the estate of the person who has died.
Before the next of kin or executor named in the will can claim, transfer, sell or distribute any of the deceaseds assets they might have to apply for a grant of probate.
The person for dealing with probate when a person dies is called the Executor (if there is a will or the Administrator if there isnt a will).
The Executor/Administrator is responsible for overseeing or working on all the legal, tax and administrative aspects on the Estate (they can use solicitors and accountants to help with this work).
One of these duties will be to understand, calculate and pay any tax that is due from the Estate, including inheritance tax, Capital Gains Tax, and other taxes such as Income Tax if they are applicable to the estate.
During the period following a death the assets in that Estate will need to be either sold or transferred. If assets are sold/disposed of for a profit (gain) then these may be liable for Capital Gains Tax from the estate. If the deceased person sold any assets in the tax year leading up to their death, then these could also be liable for Capital Gains Tax from the estate.
One the assets are transferred to the Beneficiaries of the estate, then the beneficiaries may be liable for things like CGT if they sell those assets and make a gain from the sale.
Who needs to pay the Capital Gains Tax?
During the administration period or probate after a person dies, if Capital Gains Tax is payable, the Executor will be responsible for settling the Capital Gains Tax bill out of the Estate before distributing monies to the Beneficiaries. This means that the Beneficiaries will not be liable for Capital Gains Tax, as this will already have been settled before they receive their inheritance.
However, if you inherit an asset and this is transferred to you, it becomes your property. If you then sell this asset on for a profit/gain, you may be personally liable for Capital Gains Tax.
Deductions for Capital Gains Tax
When you sell the property, you can deduct certain expenses from the gain/profit youve made from the sale to reduce your CGT liability. For example, allowable deductions are:
- Estate agents fees
- Solicitor fees
- Advertising costs for finding a buyer
- Costs of any improvement work (if you’ve added an extension for example. Maintenance costs, such as decorating, don’t count here)
- Auctioneers fees (if you sell through auction)
- Costs of a surveyor
How much is Capital Gains Tax on a property?
How much CGT you may need to pay can be complex as there are factors that will affect the amount of tax you pay.
You pay a different rate of tax on gains from residential property than you do on other assets.
You only have to pay CGT on your overall gains above your Capital Gains Tax allowance (tax-free allowance called the Annual Exempt Amount). The Capital Gains tax-free allowance is £6,000 (or £3,000 for trusts). Any gain made above the allowance will be a taxable gain.
If you pay higher rate Income Tax
If you’re a higher or additional rate taxpayer you’ll pay:
- 28% on your gains from residential property
- 20% on your gains from other chargeable assets
If you pay basic rate Income Tax
If you’re a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets.
So, your Capital Gains Tax bill will be affected by the following:
- The value of the asset being sold.
- The type of asset.
- How long you’ve owned the asset.
- Your personal tax situation (higher or lower rate tax payers will pay different amounts).
How much Capital Gains Tax will I have to pay?
There are a few steps to consider when working out your CGT liability.
Step 1 - Working out your total gain or profit.
This is the value of the property sold, minus its original value and all costs involved.
For example, if you sold the inherited property for £300,000 and it was worth £200,000 when you inherited it and you spent £2,000 on estate agent fees and £2,000 solicitors’ fees. The calculation will be:
£300,000 (sold price) - £200,000 (original value) - £2000 estate agents fees) - £2000 (solicitors fees) = £96,000 (total gain)
This means your total gain on the inherited property would be £96,000.
Step 2 - CGT allowances and deductions for the year.
As covered above, the current Annual Exempt Amount is £6,000. If you haven’t used this yet in the year, then you will have £6,000 of your profit exempt from CGT.
Your total gain will just be your total gain minus the Annual Exempt Amount.
In this example above, the calculation would be £96,000 - £6,000 = £90,000
Step 3 - Total amount of CGT payable
This will depend on your Income Tax band as an individual. The current Income Tax bands are as follows:
- Up to £12,570 = tax rate is 0%
- £12,571 to £50,270 = tax rate is 20%
- £50,271 to £150,000 = tax rate is 40%
- Over £150,000 = 45%
If you earn £25,000, to calculate how much you have left after taking off your personal tax allowance, the calculation would be: £25,000 (your income) minus £12,570 (personal tax allowance) = £12,430
Minus £12,430 off £37,700 (the basic rate tax band less the personal allowance) to see how much capital gains you will need to multiple by the basic Capital Gains Tas rate of 18%. Anything above £37,700 will be taxed at 28% CGT.
£37,700 – £12,430 = £25,270 to be charged at the basic rate of 18%. The rest of the gain (£64,730) will be charged at a higher tax rate of 28%.
£25,270 multiplied by 18% tax rate = £4,548.60
£64,730 multiplied by 28% tax rate = £18,124.40
Total CGT to pay = £22,673
What is the CGT payment deadline?
There are strict rules around paying Capital Gains Tax. You need to report and pay any Capital Gains Tax owed to HMRC within 60 days for any residential property sold. The 60 days starts when the sale completes.
Do I have to pay CGT if I move into an inherited property ?
If you inherit a property and decide to live in that property as your main residence, you won’t need to pay CGT if and when you choose to sell that property as you will be entitled to “private residence relief”.
How can I avoid capital gains tax on inherited property?
You will only pay tax on the increase in the value of the property since the person passed away. Therefore, if you sell the property immediately on inheriting it for todays value so that theres no increase in value, there will be no CGT to pay on sale.
If you sell the property and make a gain of £6,000 or less, then you may be able to avoid CGT by using your Annual Exempt Amount (see above) if you have no other gains in that tax year.
If you live in or nominate the property as your principal/main residence you can then claim Private Residence Relief on any eventual sale and will avoid Capital Gains Tax.
Dealing with a property during inheritance can be a stressful experience at an already difficult time. People may want to move into the property if they dont currently own a property, rent out the property or sell the inherited property as soon as possible.
Selling on an inherited property may make you liable for CGT. If you do opt to sell the property then dns accountants can help by calculating Capital Gains Tax, advising on your overall tax liabilities when you inherit or come to dispose of the property.
Any questions? Schedule a call with one of our experts.
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