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.
