Do you pay Capital Gains Tax on inherited property?

Inheriting a house, or any type of property, can drastically increase the value of your own estate, but it can also make you liable to pay higher taxes. Specifically, if the home you’ve inherited has gone up in value since you inherited it, you may have to pay capital gains tax if and when you decide to sell it. This can produce a fairly hefty tax bill if there’s been a considerable increase in the sale value, however, there are a few ways you can get yourself off the hook for paying capital gains tax on inherited property, as we’ll outline below.

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What is capital gains tax?

Capital gains tax (CGT) is a tax that applies when an investment sells for more than its original purchase price (its base cost). We usually think of capital gains tax in terms of selling stocks from an investment portfolio, however, it also applies to other forms of investments such as property or tangible assets.

With capital gains tax, you are taxed on the profit - or “gains” - you make on the sale, rather than the whole amount you receive. For instance, if you bought a piece of artwork for £6,000 and later sold it for £36,000, the gain would be £30,000. This is the amount that your CGT liability would be calculated on.  

How much capital gains tax will I pay? 

The rate of CGT you pay is related to your income tax band. There are four tax rates bands:

Band	Taxable Income
Personal Allowance	Up to £12,570
Basic rate	£12,571 to £50,270
Higher rate	£50,271 to £125,140
Additional rate	Over £125,140

Nil or basic rate taxpayers (individuals earning an income of £50,270 or lower) pay CGT at a rate of 18% on residential property and other chargeable assets where the disposals take place after 30 October 2024. Higher and additional rate taxpayers (individuals earning over £50,270) pay CGT at 24%.

Note: CGT is not payable on gains made when a residential property is your primary residence. 

What is the capital gains tax allowance?

The capital gains tax allowance for 2024/25 is £3,000. This allowance refers to the amount of gains you can realise from assets or property in a tax year before you are liable to pay CGT. If your assets are jointly owned with another individual, you can combine your allowances, effectively doubling the gains you can make to £6,000 before any CGT is owed.

Note: You are not able to carry forward any unused CGT allowance from previous tax years. 

How can I avoid capital gains tax on inherited property?

There are only two ways to avoid paying capital gains tax on an inherited property:

1. Make the inherited property your principal residence
   Through doing this, you avoid paying capital gains tax when you sell it at a later date. This is because the rules state that you are not liable to pay CGT on a home that is your principal residence (your main home), so long as you have lived in it the entire time you’ve owned it (although there are certain allowable absences including the last 9 months of ownership and work-related absences). This allowance only applies on the condition that you do not let any of the home out, either for living or business purposes. However, letting relief might still be available if the letting of the property has been the taxpayer's main or only property.

    

2. Sell or gift the property as soon as you inherit it
   When inheriting property, the base cost of the property for capital gains tax purposes is uplifted to the value on the date of the previous owner’s death. Therefore, immediate disposal (through sale or gift) of the inherited property would not give rise to a capital gain and therefore no CGT would be payable. However, if the inherited property is retained and increases in value after the date of death, there will be capital gains tax to pay on this increase in value.

Note: Renting out inherited property incurs an income tax charge since it is being used as a means of generating an income.

How do you calculate capital gains tax on inherited property?

Calculating capital gains tax on inherited property is no easy task. Fortunately, we’ve broken it down into clear and easy steps below:

• Calculate your total gain

The total gain is the value you sold the property for minus the value when you inherited it, minus all additional costs spent on the property, including legal fees. You also qualify for relief on enhancements such as adding an extension or conservatory. 

However, where a property is in a poor state of repair and being ‘done up’ prior to selling, this would fall under maintenance and would not qualify for relief.

However, enhancing a property, e.g. adding a extension or conservatory would be. 

Total gain = (value of property when sold - value of property when inherited) - additional costs 

• Deduct your capital gains allowance to get your taxable gain

As mentioned above, the capital gains tax allowance for the 2024/2025 tax year is £3,000. This is the total gain you can make from all your assets or property before you have to pay CGT. If you haven’t used any of your CGT allowance on other assets, you can use the full £3,000.

Taxable gain = (total gain - capital gains allowance) 

• Calculate your tax rate and multiply by taxable gain to get your CGT liability

Any capital gain realised is added onto your income for the tax year to calculate how much CGT is due on each portion of the gain. For example, if your income for the tax year is £45,270 and you incur a taxable gain of £10,000, £5,000 of the gain would fall into your basic rate tax band and would be taxable at 18% and the remaining £5,000 would fall into your higher rate tax band and would therefore be taxed at 24%.

Total CGT = (taxable gain x tax rate)

If you’d like to check your calculations,  HMRC has a capital gains calculator which can do all the work for you.

When is the capital gains tax deadline? 

Any capital gains on the sale of assets made in the 2024/25 tax year must be reported by 31^st December 2025 and the CGT must be paid by 31^st January 2026 via self-assessment. 

However, individuals selling residential property have 60 days from the date of the disposal to report the disposal and make a payment on account for the estimated amount of CGT payable to HMRC. This can be done online or by submitting a paper form. Any further balance will be due by 31^st January 2026 via self-assessment. If the payment on account exceeds the self-assessment liability for the 2024/25 tax year, the excess will be refunded. 

Extra tips for how to avoid capital gains tax on inherited property

• Transfer assets to joint names

If you’re married or in a civil partnership, you can transfer assets into joint names. This means you can combine your tax-free allowance making it £6,000 in 2024/25. However, any transfer you make has to be an outright gift.

• Nominate different principal homes if you're unmarried/not in a civil partnership

Unmarried and non-legally bound couples can each make a different property their main home. So, if you inherit a property and want to avoid paying capital gains tax on it, you can make it your main property, while keeping your former property as your partner’s main home. This means you can benefit from tax relief on both. Married couples and civil partners, on the other hand, are legally obligated to nominate one single home as their primary residency.

How can we help?

If you’re concerned about how much tax you may need to pay on any inherited estate or you simply want to discuss ways you might be able to minimise your tax bills, why not get in touch and see if we can help. We can work with you to advise on the best way to minimise the tax payable on your estate, while helping you build your wealth.

With tax and the regulation around it constantly changing, it helps pay to have the experience of a financial adviser to help guide you to stay on top of your taxes, come what may.

If you want to find out more about how we can help you navigate capital gains tax and inheritance tax, please get in touch and arrange a free consultation.

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Please note that the Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.

This article is intended as information only and does not constitute financial advice.  

The information contained in this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing.  Levels, bases and reliefs from taxation may be subject to change.

This article has been updated and re-published following the changes announced at the Autumn Budget on 30th October 2024.