Capital Gains Tax Calculator
For some people, inheriting a house can be a great blessing. It may provide them with a place to live, or give them another source of income if they decide to rent the place out. For others, however, it can seem like a curse, making selling it the only option. The related taxes can overwhelm even those who have been through it all before. This post will look in detail at Capital Gains Tax (CGT) on the sale of an inherited house in the hope of relieving some of the stress you may be feeling.
What is Capital Gains Tax?
As GOV.UK states, ‘Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value’. Your inherited house is the asset, and if it increased its value from the date of death to the time of sale, then you may be taxed. You won’t be taxed if the gain is less than £11,700 (figures relevant for 2018/19 financial year). This is known as the Annual Exempt Amount. However, any increase above this and CGT kicks in.
How do I work out and pay my Capital Gains Tax?
Work out the gain. Usually, this is done by subtracting the amount you paid for the house from the amount you sell it for.
Deduct any losses such as estate agent fees, solicitor’s fees and any maintenance or improvements made to the house.
Work out the tax-rate. This is typically 28% for higher rate taxpayers and 18% for basic rate taxpayers.
In terms of inherited property, find out its market value from time of death and subtract this from its sale value. HM Revenue and Customs (HMRC) can check the market value for you. Contact information can be found here.
If you have CGT to pay:
Report your CGT to the ‘Report Capital Gains Tax’ online service. You’ll firstly need to create a Government Gateway account which can be set up from the sign-in page. Alternatively, you could report your CGT annually through a Self Assessment tax return
Upload relevant PDFs or JPGs of files explaining how you worked out your CGT.
HMRC will check this information and send you an email or letter telling you how much you need to pay.
You must report your CGT by 31st January after the tax year in which you made the gain. The tax year starts 6th April and finishes 5th April the next year. You’ll face a penalty if you send your tax return late, miss payment or send inaccurate information. It is advised you consult an accountant or solicitor beforehand.
After you’ve sold the house, fill in a ‘Post-transaction valuation check’ form.
What if I want to sell a home I inherited with someone else?
For inherited property it is the difference between their value on time of death and what you end up selling them for. You can find further information on CGT, and the associated tax forms here.
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.
You can use our handy capital gains tax calculator to help better understand if and how much tax you’ll be expected to pay.
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.
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 £11,700 is free from the tax (figures relevant to the 2018/19 financial year).
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:
£9,000 for someone on an ordinary income tax band
£14,000 for someone paying higher rates.
Can I claim any tax relief?
You may be entitled to Private Residence Relief, which can sometimes relieve you of all CGT payment. If you inherited the house and lived in it the whole time you owned it, hadn’t let part of it out, hadn’t used part of it for business, the grounds are less than 5,000 square metres and you didn’t initially inherit it to make a gain, then you will receive relief. If you don’t meet all these points then you’ll likely have to pay, at least some Capital Gains Tax. See GOV.UK’s tool to work out if you’re entitled to any tax relief.
How do I avoid paying capital gains tax when selling a property?
With 18% for basic rate tax payers and 28% for those on the higher rate, Capital Gain Tax can take a sizable amount of profit from the sale of your property. However, it doesn’t always have to be paid and can be avoided if you have owned the property for 5 years and have personally used it as your home for at least 2 of those years.
The principle residence is the home that you have physically used and occupied the most during the 5 years before the property is sold. By proving this, a single person can avoid tax on up to £250,000 worth of gain and a married couple that files jointly are exempt from £500,000.
However, this only applies if Capital Gains Tax is necessary. The tax is not applied to the entire amount a property is sold for, just any gains that are made. It is calculated using the difference between the amount you bought and sold the property for, even then it is only paid on profits over £11,700.
For example, if a property is sold for £100,000 more than it was bought for, providing it wasn’t a principle residence, tax would only be paid on £88,300. Therefore, a basic rate tax payer will pay £15,894 in Capital Gains Tax while those on a higher rate will pay £24,724.
It is important to note that these figures are unique to residential properties and other assets may carry different rates. Alongside this, the tax-free figures can change with each financial year, the 2018/19 figure of £11,700 showed a £400 increase on 2017/18’s £11,300.
Typically, Capital Gains Tax is paid by those with property portfolios who look to buy, improve and sell houses to make a profit. So, if you’re looking to downsize your home or need a quick sale on your main home, it will more than likely be one less tax to worry about.
If you’re selling an inherited property, you will only be eligible to pay Capital Gains Tax if you already own a property, making the inheritance your second. If this is the case, then you need to tell HMRC which property is your main home. Once this has been done, the typical rules for Capital Gains Tax will apply depending on whether you decide to sell your home, or the second property.
Regardless of whether you’re due to pay Capital Gains Tax on the sale of a property, it still has to be declared through HMRC. Failure to do so could risk accusations of tax evasion.
We hope this post has made the CGT process considerably clearer, giving you greater confidence to deal with it effectively. If you’re still unsure, we suggest talking to family and friends who have been in similar situations, and further consulting an accountant and solicitor for clarification. Plus, you can check out our CGT calculator here. As they say, tax doesn’t have to be taxing.
Capital Gains Tax Calculator
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IMPORTANT! Our tax calculators work on assumptions and the data that you input. While we’ve tried to make them as accurate as possible, your unique, individual circumstances may alter your result in a way that our calculator can’t account for.