Do you Pay Capital Gains Tax on Inherited Property in the UK?

Inheriting a house or any property increases the value of your estate and makes you liable to pay higher taxes. Especially if your inherited home has gone up in value since its inheritance, you may need to pay capital gains tax (CGT) if and when you want to sell the home. 

So, do you pay capital gains tax in the UK also? If there has been a significant rise in the sale value, you may have to pay a hefty tax bill. Nevertheless, there are ways to avoid capital gains tax on your inherited property. 

What is capital gains tax? 

Capital gains tax (CGT) is applicable when your investment sells for more than its original price when purchased. There is a belief that capital gains tax only applies when selling stocks from an investment portfolio. However, that is not the case; it also applies to other forms of investments like property or tangible assets. 

As the name suggests, you will pay tax on the profit (gains), not the sale price. For instance, if you bought a painting for £6,000 and then sold it for £36,000, that means you gained £30,000, which is the amount you will have to pay CGT on. 

You do not have to pay CGT or income tax immediately when you inherit a property; HM Revenue and Customs (HMRC) will connect with you if you owe any inheritance tax. 

When do you pay capital gains tax in the UK? 

One does not pay capital gains tax when he sells his home. You only pay it if you profit from selling a property that is not your primary home. If you own two properties in inheritance, you must inform HMRC which property is your main home. 

If you do not inform HMRC which one is your main home, it will decide whether a property was your main home when selling it. 

Capital gains tax allowance 

The capital gains tax allowance refers to the number of gains or total profit you can make from an asset in a tax year before you are required to pay tax on it. The allowance for the year 2022-23 is £12,300.

If you own assets jointly with another individual, you can combine your allowance and double the gains you can make before any CGT is owed, i.e., £24,600. 

Remember that you cannot carry forward any unused CGT allowance to the next tax year from the previous tax year. 

How can you avoid CGT on the inherited property? 

There are only two ways to avoid CGT on inherited property. These are:

• Make the inherited property your principal residence 

You can avoid CGT by doing this because rules say that you do not have to pay CGT on a house that is your main residence.

• Sell or gift the inherited property immediately. 

If the value of your property is the same at the time of selling it as it was at the time of inheriting it, then you are not required to pay CGT. 

If you rent the property, you will be liable to pay income tax because you are using it to generate income. 

Bottom Line

In conclusion, you pay CGT only when you make a profit or gains above your capital gains tax allowance. You only pay CGT on your inherited property when you profit from selling it and if it is not your main home. 

If you are concerned about CGT on your property, have doubts, or are looking for the best advisor for capital gains tax in London, get in touch with us and get the best help.