For some people, inheriting a house can be a great blessing. It may provide them with a place to live, or give them another source of income if they decide to rent the place out. For others, however, it can seem like a curse, making selling it the only option. The related taxes can overwhelm even those who have been through it all before. This post will look in detail at Capital Gains Tax (CGT) in the hope of relieving some of the stress you may be feeling.
What is CGT?
As GOV.UK states, ‘Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value’. Your inherited house is the asset, and if it increased its value from the date of death to the time of sale, then you may be taxed.
You won’t be taxed if the gain is less than £11,300. This is known as the Annual Exempt Amount. However, any increase above this and CGT kicks in.
How do I work out and pay my CGT?
- Work out the gain. Usually, this is done by subtracting the amount you paid for the house from the amount you sell it for.
In terms of inherited property, find out its market value from time of death and subtract this from its sale value. HM Revenue and Customs (HMRC) can check the market value for you. Contact information can be found here.
- Deduct any losses such as estate agent fees, solicitor’s fees and any maintenance or improvements made to the house.
- Work out the tax-rate. This is typically 28% for higher rate taxpayers and 10-20% for basic rate taxpayers.
If you have CGT to pay:
- Report your CGT to the ‘Report Capital Gains Tax’ online service. You’ll firstly need to create a Government Gateway account which can be set up from the sign-in page. Alternatively, you could report your CGT annually through a Self Assessment tax return
- Upload relevant PDFs or JPGs of files explaining how you worked out your CGT.
- HMRC will check this information and send you an email or letter telling you how much you need to pay.
You must report your CGT by 31st January after the tax year in which you made the gain. The tax year starts 6th April and finishes 5th April the next year. You’ll face a penalty if you send your tax return late, miss payment or send inaccurate information. It is advised you consult an accountant or solicitor beforehand.
- After you’ve sold the house, fill in a ‘Post-transaction valuation check’ form.
What if I want to sell a home I inherited with someone else?
There is also CGT to pay. This is typically the difference between what you paid for your share and what you sold them for. For inherited property, as above, it is the difference between their value on time of death and what you end up selling them for.
You can find further information on CGT, and the associated tax forms here.
Can I claim any tax relief?
You may be entitled to Private Residence Relief, which can sometimes relieve you of all CGT payment. If you inherited the house and lived in it the whole time you owned it, hadn’t let part of it out, hadn’t used part of it for business, the grounds are less than 5,000 square metres and you didn’t initially inherit it to make a gain, then you will receive relief. If you don’t meet all these points then you’ll likely have to pay, at least some CGT. See GOV.UK’s tool to work out if you’re entitled to any tax relief.
We hope this post has made the CGT process considerably clearer, giving you greater confidence to deal with it effectively. If you’re still unsure, we suggest talking to family and friends who have been in similar situations, and further consulting an accountant and solicitor for clarification. As they say, tax doesn’t have to be taxing.Back to all articles