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Inheriting a property can bring with it a huge number of questions. One of the most important ones that you’ll want a quick and simple answer to- what taxes do you need to pay?
Inheritance tax is the first factor that you want to consider. Usually, any inheritance tax is paid directly from the estate of the deceased, meaning it doesn’t fall to you. However, if the estate does not cover the tax, it may fall to you as the inheritor. You are given 6 months to pay the outstanding balance, after which point you will also be charged interest, so it’s best to take care of it sooner rather than later.
When don’t you have to pay inheritance tax?
If the value of the entire estate of the deceased is under £325,000, you will not have to pay inheritance tax. Inheritance tax is also not applied if everything in the estate was left to the deceased spouse, civil partner, a charity, or a community amateur sports club.
The standard inheritance tax is 40% of anything over £325,000, however, this can be reduced to 36% if the deceased left 10% of their estate to a charity. Business relief may also allow certain assets to be free of inheritance tax charge, which can range from 50% to 100%.
What about gifts?
If the deceased gifted you something, whether it be money, business, or property, before their death, it is usually not taxed. This can differ if the items that the deceased gifted had a combined value of over £325,000 in the 7 years before death. It is important to know the 7-year rule of inheritance tax on gifts so you know exactly where you stand;
Years between the giving of the gift and the deceased’s passing
You may have to pay capital gains tax if you make a profit from selling certain items, such as shares or other investments, like particular bonds, property, or units in a trust. There are special circumstances that would mean you were not liable to pay capital gains tax, such as-
You’re living abroad and the property is in the UK
If you decide that you’d like to rent out the property that you’ve inherited, then you may have to pay income tax. You’ll need to fill out a self-assessment tax return to confirm, as it will depend on the profit the property is making. Anything over a profit of £11,500 a year will be taxed, however, it’s important to know that the profit is based on turnover, not the gross profit. This means that you minus your annual personal allowance.
The type of form that you need to fill out will differ slightly, depending on how you’re renting the property. There are a few options; whether you’re renting a single room in your house, a full property, a property outside the UK, or a UK property whilst you’re living abroad.
Knowing what tax you may be liable to pay is important when you’re inheriting a property, as you want to know exactly what you’ll need to be paying so you’re not caught out along the way.