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When it comes to inheriting a property, there are various taxes and situations which mean in some cases, the answer to the title question will be ‘yes’ and in others, ‘no’ and ‘maybe’. This post will go through both the taxes and situations, aiming to provide you with some clarification.
You do not pay stamp duty, income tax, or capital gains tax on a property you inherit. If the estate of the deceased can’t pay inheritance tax it may be on you to make payment. You will be contacted by HM Revenue & Customs if this is the case.
This is a tax on the property and money of the deceased.
There is usually no inheritance tax to pay if:
The value of the house is below £325,000 (if left to a spouse or civil partner) or £425,000 (if left to children, step-children and grandchildren).
The £425,000 threshold is set to continually rise the next few years, from £450,000 in 2018 to £500,000 by 2021. Find out more about this here.
The house is left to an ‘exempt beneficiary’ (e.g. charity).
If the house’s value is above the inheritance tax threshold (i.e. £325,000/425,000), then the amount above the threshold will be subject to a 40% tax rate. For example, if the house is worth £425,000 and your threshold is £325,000, then the tax charged will be £40,000. (425,000-325,000 = 100,000@ 40% = 40,000). Currently, the thresholds are fixed until 2021.
If you believe there may be tax to pay, use this calculator to work out your potential reduced inheritance tax rate.
If there is inheritance tax to pay:
The executor of the will (if there is one) usually pays the tax. Otherwise, the estate administrator does so. It’s usually paid from the sale of assets (e.g. the property) or estate funds. The deceased may also have left you money to cover it. If not, then it is up to you. HMRC will contact you if tax is due.
This tax should be paid within 6 months of the deceased’s death. If not, HMRC may charge interest. You can opt to pay the tax over a certain number of years, but this may also be subject to interest. If you’re thinking of selling the house, all inheritance tax must be paid off beforehand.
What if the home was left as a gift?
If you received the house as a gift at some point in the seven years before the person died, then the threshold rules still apply. Any home valued above the threshold is subject to potential inheritance tax in the form of the 7-year rule. This states a connection between the number of years between the house being gifted, the death and the tax due. For example, if there are 0-3 years between the two former variables, then there is a 40% tax rate, whereas 7+ years incur no tax. See below for more detail.
If you inherit a house already producing an income (e.g. from share dividends), or if you decide to rent out the property, then you may have an income tax to pay.
The amount you pay depends on how much profit (e.g. rental income minus expenses) you make and your circumstances. See here for income tax rates and here for more information.
According to the Money Advice Service, it is also possible the ‘deceased could have paid too much or even too little Income Tax’. Therefore, ‘the deceased’s estate might owe tax to the government, or it could be owed a tax refund’. It is worthwhile contacting HMRC or the Tell Us Once Service about this to adjust the amount owed. Check out GOV.UK’s helpful page for more information on this service.
Capital Gains Tax
If you decide to sell an inherited house that has increased in value from the time of death to the time of sale, then CGT is a tax on the profit you make from the sale. You get an Annual Exempt Amount of £11,700 but profit above this will be taxed, dependent on the gain, the losses and whether you are a higher or basic rate taxpayer.
(figures relevant to the 2018/19 financial year)
Are there any ways I can reduce the amount of tax I will have to pay?
Usually, no. However, if the deceased took out a life insurance policy which is ‘held in trust’ you may be able to avoid inheritance tax altogether. The policy pays out to the trust upon their death and the money is used to pay for some or all of your inheritance tax. You’ll need to fill in the Schedule IHT410 form upon their death if they had a policy.
If you were given the house as a gift from a family member still living, it could be worthwhile speaking to them about taking out a policy as it could benefit you in the long run.
The, ‘Using life insurance to pay Inheritance Tax’ section from the Money Advice Service’s, ‘A guide to Inheritance Tax’ provides greater detail and further links for useful policy information.
They say two things in life are certain: death and taxes. Though uncertainty can sometimes lie in knowing which death-related taxes to pay, we hope this post has made things a clearer. If you're currently dealing with an inherited property and are looking to sell it, contact us today at We Buy Any House. We can provide a free quote for your property and see how we can help you.