Inherited a house and need to sell? How much tax will I need to pay and how long will the process take?
How much tax will I need to pay and how long will the process take?
Inheriting a property is a stressful time can lead to a lot of questions. Most of the time you
will not have to make any immediate decisions. This is because the estate will enter
probate. Probate is a process where the executors of the will settle debts and settle the
deceased’s affairs before handing over the assets their beneficiaries. Probate is a lengthy
process and can take up to a year. Selling your property can take another 6 months, all the
while bills will still need to be paid. The beneficiaries have 6 months to pay the inheritance
tax due after the person’s death, this is usually arranged by an executor. This means that
often the property will have to be sold to pay the inheritance tax bill.
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More detail on the tax you will be required to pay can be seen below:
What tax is due when inheriting a property?
There are various taxes due when inheriting a property. Firstly, there is inheritance tax.
When you die, your estate will be passed on to your beneficiaries outlined in your will. Your
estate is the legal term for everything you own. If the value of the estate is below £325,000,
then no inheritance tax will be charged. Any value above the £325,000 threshold will be
charge at 40% rate of tax. You will have six months to pay this sum, so it is usually organised
by the executors during probate. HMRC will charge interest once the six months is up,
proving costly as you wait for the inherited property to sell.
There could be up to three types of tax due when inheriting a property. Firstly, there is
inheritance tax. Depending on the value of the property and the total value of the
deceased’s estate, inheritance tax may need to be paid. The fundamental rule with
inheritance tax is that if the total value of the estate, including property, shares, savings and
any other assets, are worth in excess of £325,000, then 40% of everything in excess of
£325,000 will be taxed at a rate of 40%. However, there are some exemptions outlined
Exemptions to inheritance tax
There is an exemption for main residences that are passed onto a direct descendant. This
means that your inheritance tax bill will be reduced if you’ve inherited your parent’s or
grandparent’s property. The main residence tax threshold is £175,000. This is added to the
main inheritance tax allowance of £325,000, meaning you could be able to inherit a
property worth up to £500,000 tax free. This main residence tax threshold will increase in
line with CPI for years subsequent.
Inheritance tax is due within 12 months of death and will be settled by the executors of the
estate. It is possible to pay inheritance tax in annal instalments.
Additional exemptions include allowances between spouses. This means that if one of your
parents or grandparents has already passed and their inheritance tax allowances weren’t
used then the amount available to pass on tax free will increase. For example, if both
parents have died but the first to die had left all their assets to the surviving spouse, then
that spouse dies, an estate worth up to £950,000 could be passed on tax free to their
children or grandchildren.
Capital gains tax on an inherited property
Capital gains tax is only due on an inherited property if you decide to sell it and the property
has increased in value since you inherited it. The tax only has to paid on the increase in
value. Capital gains tax is levied at 18% on gains from residential property if you’re a basic
rate taxpayer. For higher and additional rate taxpayers this rises to 28% on residential
property and 20% on all other assets. Everyone gets an annual capital gains tax allowance of £12,000. If you move into the property and it becomes your main residence, capital gains
tax will not be applied.
Inheriting a Buy-To-Let Property
Firstly, you should decide what you want to do with the property. If you want to sell the
property or live there you will have to evict the tenants first. To do this you need to check
the terms of the rental agreement originally signed. If you wish to continue letting the
property, then you will need to get a new contract drawn up naming you as the landlord.
Where there is a buy to let mortgage on the property, it will either need to be moved into
your name of mortgaged in a new deal. Whichever route you choose you will have to pass
the lender’s affordability tests.
Insurance when inheriting a house
While the property is in probate it is likely to be unoccupied. You will need to be covered
during this period and can purchase unoccupied property insurance to protect you against
damage or criminal acts.
How inheriting a property could affect your future house purchases.
If you are inheriting a property you will become a homeowner. This means that if you are
not already a homeowner, your first-time buyer status will be removed and therefore you
won’t benefit from the government help-to-buy ISA bonus, nor will you receive first time buyer stamp duty relief. Additionally, if you keep the property you’ve inherited, you’ll have to pay the additional stamp duty rate (3%) when purchasing another property.
Inheriting a property with siblings
Inheriting a house with other people does complicate matters, so you’ll need to make all
decisions jointly with all the owners of the property. The simplest option is to sell the
property and divide the proceeds accordingly, however you may choose to rent it out. If so,
you will need to choose who will manage the property and how you will split the costs and
income. Alternatively, one of you may want to live in the house. If this is the case, then you
will need to come to an agreement of your own with the other homeowners.