Lets break it down for you...
Inheriting a rental property can feel like a mixed blessing. While it may provide income or a valuable asset, it also brings tax responsibilities you might not expect.
When you inherit a property, the probate process determines the value of the property at the time of the deceased's death, which is crucial for calculating tax on inherited assets. When someone leaves you a property in their will, you might need to pay Capital Gains Tax (CGT) when you eventually sell or give it away.
The good news? You’re only taxed on gains made since you inherited the property, with the gain calculated from the probate value at the time of the deceased's death. The probate process ensures this value is established for tax purposes. Understanding your tax position early can save you stress and potentially thousands of pounds when you decide what to do with the property.
What is self assessment CGT on inherited rental property?
Self assessment CGT on inherited rental property means reporting and paying tax on the profit you make when selling a residential property you’ve inherited. The “self assessment” part refers to the system where you calculate and declare the gain yourself through HMRC’s tax return process.
Your gain is calculated as the difference between the property’s value when you inherited it (the probate value) and what you sell it for. To calculate CGT, you need to determine the gain, apply any available allowances, and then work out the tax due based on the applicable rate.
CGT calculations for residential property, such as inherited rental homes, may differ from those for other chargeable assets, with higher rates of either 18% or 28% depending on your income tax band.
You must report property sales to HMRC within 60 days of completion, and you must also include the details of the sale in your self assessment tax return.
When do I need to pay CGT on an inherited property?
You’ll need to pay CGT if you sell the inherited property for more than it was worth when the person died. If you moved into the property as your primary residence straight after inheriting it, you may be eligible for primary residence exemptions, such as Private Residence Relief, on some or all of the gain.
For rental properties that you continue to let out, CGT will apply to any increase in value during your ownership. The current tax-free CGT allowance, also known as the annual cgt allowance, is £3,000 (for 2024/25), but this has been reducing in recent years.
If there are multiple beneficiaries, each must report their share of the gain individually, as each beneficiary has their own CGT liability if multiple people inherit shares of the same property.
How do I work out how much I owe?
Start with the selling price and subtract the property’s value at the date of death (the probate value). You can then deduct any costs of selling, such as estate agent and solicitor fees, as well as other allowable costs when calculating capital gains tax.
Also deduct the cost of any improvements you made to the property, but not regular maintenance or repairs. The total gain is calculated by subtracting the probate value and allowable costs from the sale price. Unlike other assets, the original purchase price is not used for inherited property; instead, the probate value at the date of death is used. Apply your tax-free CGT allowance to reduce the taxable gain.
The gain should be reported in the relevant tax year. Finally, apply the appropriate tax rate based on your income tax band (18% for basic rate, 28% for higher or additional rate).
What expenses can reduce my CGT bill?
Major home improvements like extensions, new kitchens, or bathroom renovations can be deducted from your gain. Professional fees related to buying or selling the property count too, as do costs incurred defending your legal right to the property.
If you paid Stamp Duty when transferring the property into your name, this can also be included. Keep all receipts and invoices, HMRC may ask to see them years later.
I once helped a client who had inherited a rental flat in Manchester and had nearly thrown away receipts for a new boiler and kitchen renovation. By keeping these documents, she reduced her CGT bill by over £1,200 when she sold three years later.
If you sell an inherited property for less than its probate value, you may incur a capital loss. Such capital losses can be carried forward indefinitely to offset future gains, providing valuable tax planning opportunities.
How do I report the gain on my tax return?
You’ll need to register for self assessment if you haven’t already. Gather all your paperwork before starting: probate valuation, sale documents, and receipts for any improvements. Records from previous tax years may also be relevant for calculating your gain.
Complete the Capital Gains sections of your tax return, providing details about the property and how you calculated your gain. Make sure to use accurate property values for correct reporting. If the sale completed after April 6th, you’ll include it in that tax year’s return (due by January 31st the following year).
For property sales, you must also file a Property Disposal Return within 60 days of sale completion, even if you’ll be including it on your self assessment later.
What mistakes should I avoid when reporting CGT?
Missing the 60-day deadline for reporting property sales is a common and costly mistake. Using the wrong valuation date is another error, it should be the market value at the date of death, not when probate was granted. Obtaining a professional valuation can help avoid errors in reporting and ensure the correct value is used for tax planning purposes.
Forgetting to keep receipts for improvements could unnecessarily increase your tax bill. Not checking if you qualify for any reliefs, especially if you’ve lived in the property at any point, is also a missed opportunity. Failing to consider your taxable income can lead to paying more taxes than necessary, as taxable income affects your overall tax liabilities, including those related to inherited assets and rental income.
Trying to handle complex inheritance tax situations without professional advice can lead to expensive mistakes.
Inheritance tax considerations for inherited rental property
Inheriting a rental property brings with it important tax implications, particularly around inheritance tax and capital gains tax. When a person dies, their estate, which includes any rental properties they owned, is assessed for inheritance tax. In the UK, the standard inheritance tax threshold (the nil-rate band) is £325,000. If the total value of the estate exceeds this amount, inheritance tax is charged at 40% on the excess. However, if the property is left to direct descendants, such as children or grandchildren, the residence nil-rate band can increase the threshold up to £500,000, potentially reducing or even eliminating the inheritance tax liability.
It’s important to note that inheritance tax is usually paid by the estate before assets are distributed to beneficiaries, so you may not have to pay inheritance tax directly when you inherit property. However, understanding the value of the property at the date of death, the probate value, is crucial, as this figure is used as the base cost for capital gains tax purposes if you later decide to sell the property.
Once you inherit a rental property, capital gains tax becomes relevant if you sell the property for more than its probate value. The capital gain is calculated by subtracting the probate value (the property’s value at the time of the deceased’s death) from the sale price. You can deduct allowable expenses such as estate agent fees, legal fees, and the cost of any capital improvements made during your ownership to reduce your taxable gain. The resulting taxable gain is then subject to capital gains tax at the rate that matches your income tax band: 18% for basic rate taxpayers, and 28% for higher or additional rate taxpayers.
There are ways to reduce your capital gains tax liability. If you lived in the property as your main residence at any point after inheriting it, you may be able to claim private residence relief, which can exempt some or all of the gain from capital gains tax.
Do I need help with my tax return?
If you’re dealing with a high-value property or multiple inheritances, professional advice can often save you more than it costs. A tax advisor can identify reliefs you might miss, ensure you’re calculating your gain correctly, and explain how being an additional rate taxpayer affects your CGT rate.
They can also help if the property was owned by multiple people, if you need to transfer assets between civil partners as a tax-efficient strategy, or if there are complications with the probate valuation. Even if your situation seems straightforward, a quick consultation could highlight tax-saving opportunities, including those related to other chargeable assets.
Pie is the UK’s first personal tax app dedicated to helping working individuals handle their tax burdens. As the only self assessment solution with integrated bookkeeping, real-time tax figures, and simplified returns, it can make managing inherited property tax much easier.
Final thoughts on inherited property and CGT
Dealing with tax after losing someone close to you isn’t easy, but understanding the basics can make it less stressful. Start by getting a proper valuation of the property at the date of death, this will be your starting point for any future gain.
Keep detailed records of all property-related expenses from day one of your ownership. If you decide to rent out the inherited property, make sure to track and report any rental income for tax purposes. Think carefully about your plans for the property, as this affects your tax position.
Remember that the tax free allowance for capital gains tax can change, especially following announcements in the autumn budget. Tax rules change, so what applies today might be different when you eventually sell. If you inherit overseas assets, be aware that rules for UK capital gains tax may differ. Staying informed is your best defense against unexpected tax bills.
Quick and Easy Guide to Track Property Income and Expenses in the Pie App
Follow these steps to get started:
Once you’ve created an income source, you can proceed to the bookkeeping section of the app on your navigation bar. Swipe right on any eligible transaction to add it as an Income & expense you want to declare on your tax return, moving it to the 'income' & ‘expense’ tab.Step 1
After adding all the information, you can view your real-time figures on the homepage of the Pie Tax App.Step 2
