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Whether you’re the executor or a beneficiary, sorting the last will and testament can be tough for everyone involved. Dealing with the added taxes that come with any inheritance can make a bad situation even worse, especially if you’re not sure where to turn for guidance.
The main tax that may have to be paid is Inheritance Tax. This is calculated if the total estate of the deceased reaches over £325,000, anything above this threshold is taxed at a 40% rate. For example, if an estate is worth £425,000 then £100,000 of this will be taxable, meaning a total of £40,000 will be owed.
We’ve provided more in-depth detail on Inheritance Tax and when you pay it in a previous blog, but knowing if you have to pay Capital Gains Tax on an inherited property can be a bit trickier to understand.
While Inheritance tax can be straightforward, knowing if you need to pay Capital Gains Tax on an inherited property can be a bit trickier to understand.
When it comes to inherited assets, Capital Gains Tax is paid on any profit you make from selling properties that aren’t your first home. So, you only pay this tax if you decide to sell the property at a later date.
How much Capital Gains Tax should I expect to pay?
To figure out the amount of Capital Gains Tax owed, you need to find out if and how much of a profit you’ll be making. Since the property is inherited, it is valued at what it would have been worth upon the date of death.
Next, you can deduct any costs that may have accrued over the process of the property’s sale. So, the estate agent or solicitor fees and any costs for improvements to the property can all be subtracted from the amount taxable by Capital Gains Tax.
If you do need to pay the tax, then for a residential property someone within a basic rate of income tax will be charged 20%, while those paying higher rates will be charged 28%.
Are there any Capital Gains Tax Allowances?
As with many taxes throughout the UK, Capital Gains Tax has a tax-free allowance. As of 2018 the allowance meant that the first £11,300 is free from the tax.
So, if you sell the inherited property and make a gain of £61,300, you would only be taxed on £50,000. This works out as a Capital Gains Tax contribution of:
£10,000 for someone on an ordinary income tax band
£14,000 for someone paying higher rates.
Inheriting a second home could present an opportunity to earn some extra money through rent. However, this isn’t a possibility for everyone and some may need to sell the property as soon as possible. Knowing the relevant taxes such as Capital Gains Tax can help you make more informed decisions on what’s best for the inherited property.
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