06, June, 2023

How can I avoid capital gains tax on a property I inherited?

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If you have recently inherited a property and you’re intending to sell it on, you may be concerned about the capital gains tax you might be liable to pay. Here at We Buy Any House, we’ve put together a handy article to try and help you reduce your capital gains tax bill.

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When do I pay Capital Gains Tax?

The first thing to know is that you will only need to pay capital gains tax on the profit that you make on the property that you sell from its initial value, not the full sum that you sell the property for. There is also a yearly capital gains tax allowance that you’re entitled to, which will allow you to have £12,000 of that profit tax-free.

With that information, what some inheritors choose to do is sell in parts over two tax years; by selling one set of shares in March and the following shares in April after the new tax year starts, you’re able to take advantage of two-year’s worth of the capital gains tax allowance and effectively save £24,000 from being taxed.

Can I deduct any losses?

You’re also able to deduct capital losses from your capital gains to get a net gain. This can bring your tax bill down if you account these losses; for example, if you previously sold another house for £30,000 less than it was originally purchased for, you can claim that £30,000 as a loss and have it deducted from the profit you make on the inherited house. It’s worth knowing that you can claim losses from the past 4 years to bring down your capital gains tax, so it’s worth including any losses at all as it can add up quite quickly.

Transferring gifts between spouses are free from capital gains tax, so some inheritors decide to gift the property to their partner to sell if they are in a lower tax band. Basic-rate tax-payers pay 18% capital gains tax on property, but higher or additional-rate tax-payers will pay 28%, so gifting it can be a good way to reduce the tax bill after selling the property.

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You can also look at selling the property and putting the proceeds in an ISA, as you can put up to £20,000 per year into an ISA that will remain tax-free. This is helpful for inheritors who are selling a property that is only increased in value slightly but is over the £12,000 capital gains tax allowance.

What if I want to look into investing?

Some inheritors look into investing into small companies, as this allows them to reclaim income tax and capital gains tax, however, this can be a very risky option and is best left to experienced, wealthy investors who know what they’re doing and can afford to take the loss if things don’t work out.

You can look into ‘bedding your spouse’; effectively, one of you sell the asset to an outside party as the other buys it off them at the same time as you sell. This can allow you to avoid capital gains tax, but it’s important to have someone in the middle as you aren’t able to sell the house directly to your spouse and stay exempt from the tax.

What can I deduct from my tax bill?

There are a few things that you can also deduct from your tax bill-

  • Solicitors and surveyor bills
  • Valuation fees
  • Stamp duty for the property
  • Any work that you did to significantly improve the property and increase the market value, such as a new boiler, or a renovated kitchen.

Knowing this handy tips and tricks could help you reduce or potentially avoid capital gains tax altogether, however, it’s important to remember that whilst tax avoidance is perfectly legal, tax evasion is not and can carry not only a large fine but also a potential prison sentence.

Before you start looking into how you can avoid these taxes, make sure you know exactly how much you would need to pay. You can use our capital gains tax calculator to do this; and if you’re looking for a quick, hassle-free sale then contact us today at We Buy Any House for a free quote.

We buy any home in as little as 7 days, or timescales to suit you. Head to our website for more information.

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