How to Avoid Capital Gains Tax on an Inherited Property
Selling an inherited property can come with unexpected tax responsibilities. This guide explains how capital gains tax applies to inherited property, the allowances and reliefs available, and the practical steps you can take to reduce or avoid paying more tax than necessary.
Inheriting a property can feel both like a gift and a burden. While receiving a home from a loved one often carries deep emotional significance, it can also introduce unexpected financial and legal complexities. One of the most common questions beneficiaries ask is how to avoid, reduce, or manage Capital Gains Tax (CGT) on an inherited property.
While capital gains tax does not apply at the moment you inherit a property, it can become payable later when you decide to sell, transfer, or otherwise dispose of that inherited property. without the right planning, this tax liability can significantly reduce the value of your inheritance.
This comprehensive guide explains how capital gains tax applies to inherited property, outlines the most effective strategies for reducing or avoiding it, and explains when selling an inherited property may be the most sensible option. Throughout, we focus on practical steps you can take to protect the actual value of your inherited property.
Do you pay capital gains tax when you inherit a property?
One of the biggest misconceptions surrounding inherited property is that capital gains tax is due immediately.
The simple answer
- No capital gains tax is payable when you inherit a property
- Capital gains tax only applies when you sell or dispose of the inherited property
At the points of inheritance, the property forms part of the deceased’s estate. Any tax paid at this stage is usually inheritance tax, not capital gains tax. GCT only becomes relevant if the inherited property increases in value after you inherit it and is then sold.
Understanding this distribution is essential when planning what to do with an inherited property.
How is the Capital Gains Tax calculated on an inherited property?
When you sell an inherited property, capital gains tax is calculated based on the difference between:
- The probate value of the inherited property
- The final sale price
What is the probate value?
The probate value is the market value of the inherited property at the date of death. This figure becomes your starting point for calculating capital gains tax.
Capital gain on inherited property:
Sale price – Probate Vale – Allowable costs
Only the increase in value after you inherit the property is potentially taxable.
Capital Gains Tax Rates on Inherited Property
Capital gains tax on inherited property is charged at residential property rates:
- 18% for basic rate taxpayers
- 28% for higher rate and additional rate taxpayers
These rates apply after deductions such as your annual CGT allowance and allowable costs.
Using Your Capital Gains Tax Allowance on an Inherited Property
One of the most straightforward ways to reduce CGT on an inherited property is to use your annual capital gains tax allowance.
How the Allowance Works
One of the most straightforward ways to reduce CGT on an inherited property is to use your annual capital gains tax allowance.
Each individual is entitled to a tax free year. If the gain on your inherited property falls below this allowance, no capital gains tax is payable.
Key points:
- The allowance applies per person
- It resets every tax year
- It can significantly reduce the tax owed on an inherited property.
Jointly Owned Inherited Property: A Powerful Tax Advantage
If you inherited a property jointly with siblings or other beneficiaries, this shared ownership structure can offer a significant tax advantage when it comes to capital gains tax. A jointly owned inherited property allows the taxable gain to be divided among multiple individuals, often substantially reducing the overall tax bill any.
Rather than having one person liable for the full capital gain, the profit from a jointly inherited property is split according to each owner’s share. This can be particularly beneficial where owners fall into different income tax brackets or have unused allowances.
Why Joint Ownership of an Inherited Property Helps Reduce CGT
Each owner of a jointly owned inherited property benefits from their own personal tax position, including:
- Their annual capital gains tax allowance, which can be used to offset their share of the gain
- Their own income tax band, meaning gains may be taxed at a lower CGT rate for basic rate taxpayers
- The ability to plan the sale of the inherited property more strategically, based on individual circumstances
By spreading the gain across multiple owners, the total capital gains tax payable on the inherited property may be significantly reduced compared to a sole owner selling alone.
An Example of How Jointly Inherited Property Reduces Tax
For example, if an inherited property is sold and generates a £60,000 gain.
- A single owner may pay CGT on the full £60,000 (after allowances)
- Two joint owners would each be taxed £30,000
- Each owner can apply their own CGT allowance, potentially reducing or eliminating tax altogether
This illustrates how joint ownership of an inherited property can be an effective way to minimise capital gains tax, particularly when allowances and lower tax bands are fully utilised.
Live in the Inherited Property to Reduce Capital Gains Tax
One of the most effective ways to avoid capital gains tax on an inherited property is by making it your main residence.
Private Residence Relief Explained
If you live in the inherited property as your primary home, you may qualify for Private Residence Relief (PRR). This can reduce or even eliminate capital gains tax when the inherited property is sold.
To qualify:
- The inherited property must be your genuine main residence
- You must actually occupy the property, not just register the address
If you live in the inherited property for only part of the ownership period, partial relief may still apply.
Transfer an Inherited Property to a Spouse or Civil Partner
Transferring an Inherited Property to a spouse or civil partner can be an effective tax planning strategy.
Key benefits:
- Transfers between spouses are CGT-free
- Allows the use of two GCT allowances
- May be reduced if one partner pays a lower rate
This approach can significantly lower the capital gains tax payable when the inherited property is eventually sold.
Offset Capital Losses Against an Inherited Property Gain
If you have capital losses from previous investments, these can often be used to reduce CGT on an inherited property.
Examples of capital losses include:
- Selling shares at a loss
- Disposal of other assets below purchase value
These losses can be offset against gains from selling an inherited property, reducing the taxable amount.
Deduct Allowable Costs from Your Inherited Property Sale
Certain costs associated with selling an inherited property can be deducted when calculating capital gains tax.
Allowable Costs Include:
- Estate agent fees
- Solicitor and conveyancing fees
- Improvement works that add value
Not Allowable:
- Routine maintenance
- General repairs
Keeping records is vital if you plan to deduct costs from the gain on an inherited property.
Timing the Sale of an Inherited Property
When you sell an inherited property, can make a significant difference to the tax you pay.
Smart Timing Strategies:
- Sell in a tax year when your income is lower
- Use a new CGT allowance after April
- Avoid rushing into a sale without planning
Even modest timing adjustments can reduce the capital gains tax on an inherited property.
When Keeping an Inherited Property is no Longer Practical
For many beneficiaries, holding onto an inherited property is not always the best option.
Common challenges include:
- Ongoing maintenance and repair costs
- Council tax on empty inherited property
- Insurance requirements
- Family disagreements over jointly inherited property
In these situations, selling the inherited property quickly may help preserve more of its value.
Avoiding Stress by Selling an Inherited Property Quickly
Selling an inherited property on the open market can be time-consuming, especially if the property needs work or is part of an estate.
A fast sale can:
- Reduce ongoing ownership costs
- Limit exposure to capital gains tax
- Provide certainty and closure
Sell Your Inherited Property Fast with We Buy Any House
If you’re unsure what to do with an inherited property, We Buy Any House offers a simple, reliable solution.
Why Choose We Buy Any House for an Inherited Property?
- Cash offers for inherited property
- Completion in as little as 7 days
- No estate agent fees
- No chains or fall-throughs
- We buy inherited property in any condition
This is particularly helpful if you want to release funds quickly or avoid the complexities of selling an inherited property through traditional routes.
Reporting the Sale of an Inherited Property to HMRC
When selling an inherited property, many people assume that if no capital gains tax is due, there is nothing further to do. In reality, HMRC reporting obligations can still apply, even where the sale of an inherited property results in little or no taxable gain.
Understanding your reporting responsibilities is essential, as failing to notify HMRC correctly and on time can lead to unnecessary penalties, interest charges, and avoidable stress.
When Must the Sale of an Inherited Property be Reported?
If you sell an inherited property in the UK, you are generally required to report the transaction to HMRC if:
- The inherited property is a UK residential property
- The sale completes after the property has been transferred into your name
- There is a capital gain, even if that gain is covered by allowances or reliefs
Importantly, reporting may still be required even when no capital gains tax is ultimately payable. This is a common area of confusion for those selling inherited property.
The 60 Day Reporting Rule for Inherited Property
Under current HMRC rules:
- UK inherited property sales must be reported within 60 days of completion
- Any capital gains tax owed on the inherited property must also be paid within the same 60-day period.
This reporting is done through HMRC’s UK Property Account, which must be set up online. Missing this deadline can result in automatic penalties, even if the amount of tax owed is relatively small.
Penalties for Late Reporting of an Inherited Property Sale
- Failing to report the late sale of an inherited property within the 60 day window can lead to:
- Fixed late filing penalties
- Daily penalties for prolonged delays
- Interest charged on unpaid capital gains tax
These penalties apply regardless of whether the delay was intentional, making it vital to act promptly once the sale of the inherited property is complete.
Key Ways to Reduce Capital Gains Tax on an Inherited Property
To recap, the most effective strategies include:
- Using your CGT allowance
- Splitting up gains on jointly inherited property
- Living in the inherited property as your main residence
- Transferring ownership to a spouse
- Offsetting capital losses
- Deducting allowable costs
- Time the sale carefully
- Choosing a fast sale when appropriate
Making the Right Decision for Your Inherited Property
Every inherited property comes with unique circumstances. Whether you choose to live in it, rent it out, or sell it, understanding how capital gains tax applies is essential to protecting your inheritance.
If your inherited property no longer fits your plans, or you want a quick, certain outcome without market delays, We Buy Any House can help you move forward confidently.
Request your free cash offer today and sell your inherited property with speed, certainty and peace of mind.