When a loved one passes away, you may have to handle the affairs of the deceased as well as getting through grief, and capital gains tax (CGT) on inherited property is often part of the picture.

This is the last thing anyone wants to navigate, especially if they’ve already footed a large inheritance tax bill, but there’s no escaping HMRC!

The short answer is that you don’t need to worry about paying capital gains tax unless you decide to sell the inherited property. But let’s examine the issue in more detail.  

Do You Pay Capital Gains Tax on Inherited Property?

Since the intention of capital gains tax is to levy a tax on profits made from assets, it’s not relevant until you plan to treat a property as an asset by selling it. Otherwise, there are no profits.

Therefore, if you live in the house (or keep the inherited property without living in it) but don’t sell it, you won’t face any capital gains tax. This only kicks in once you decide to sell.

Keeping The House Means That You Will Not Need to the Pay Capital Gains Tax (Until You Ever Decide to Sell)

Inheritance Tax vs Capital Gains Tax (CGT)

The first tax most people consider when inheriting a property is the inheritance tax. There’s an inheritance tax allowance of £325,000, meaning you won’t owe anything on estates below this value.

For anything worth more than £325,000, you may have to pay as much as 40% of the total value of someone’s estate (but it’s much lower in most cases).

Capital gains tax isn’t specific to inherited properties. Rather, it’s a tax paid on the profits earned on assets – and it doesn’t just apply to investments like stocks.

Houses are generally exempt from capital gains tax since you’re eligible for private residence relief as long as the house is your main residence.

However, an inherited property is classed as an asset if those inheriting it already have a house they’re living in (which is usually the case). Therefore the person will face capital gains tax.

Would I Still Need to Pay Capital Gains Tax When Inheriting a House from My Parents?

Whether you inherit a house from your parents or someone else, the rules about capital gains tax are the same.

Namely, that you’ll have to pay capital gains tax if the gains are high enough.

How to Avoid Capital Gains Tax on Inherited Property

If you’re looking for tax relief, it’s best to seek professional advice rather than trying to do everything yourself. Even if you can’t afford an advisor, you may be able to get help from a charity like Taxaid, and you can already reach out directly to HMRC with queries.

However, we’ve outlined the most common strategies to avoid or reduce CGT below.

Make it a Residential Property

Make it a Residential Property

The main way to avoid capital gains tax on inherited property is to make the house your main residential property. This way, no matter when you sell the property or how much it sells for, you won’t have to pay capital gains tax.

For this to be possible, you must actually live in the house the whole time you own it, other than the allowable absences (such as absences due to work or during the final nine months of ownership, when you may be moving elsewhere).

Making the house your main residence means you’re not allowed to let it out – in this case, it is no longer your main residence.

Sell Inherited Property Immediately

Sell Inherited Property Immediately

Another option is to sell the property as soon as possible. This boosts the chance of it retaining the same market value, meaning you won’t owe tax.

However, it also means you won’t see any benefit from its value increasing.

Combine Ownership with a Partner

Combine Ownership with a Partner

Those who are married or in a civil partnership can transfer the asset to their spouse so it becomes jointly owned, which allows them to combine their tax-free allowance, reducing the CGT owed. However, this won’t mean you avoid CGT altogether unless the total gains from the asset are below the joint threshold.

For those who aren’t married or in a civil partnership, there’s an alternative. One partner can make one property (e.g., the one you currently live in) their main residence and the other person can make the other house their main residence. This way, you will get tax relief from both.

This isn’t possible for married or civil partners, who must share the same home for their primary residency.

Gift to a Charity

Gift to a Charity

If you make the property a charitable donation to a registered charity, you can avoid capital gains tax. This likely won’t be an appealing option to many people. After all, if you pay capital gains tax on your inherited property, you’ll only lose a portion of the money – but if you gift the whole thing to charity, you won’t receive a penny!

A charitable donation can either be made in the lifetime of the benefactor or outlined in a will. Leaving an estate to charity also reduces inheritance tax, so if a portion is left to charity and a portion is left to a benefactor, it can lead to the benefactor actually receiving more.

How to Calculate Capital Gains Tax (if Selling an Inherited Property)

The easiest way to determine how much capital gains tax you owe is to use the calculator in the next section. But if you want to know how the calculations work for yourself first, we’ve got you covered.

Total Gain

Calculating capital gains tax requires you to first work out the profit you made, or the total gain. This is the difference between its original value and the value when you want to sell.

In the case of an inherited property, the starting value is the house’s market value when you first inherit it.

Let’s say a house is worth £350,000 when you inherit it, and you sell it for £400,000 a year later. That’s a profit of £50,000. However, as you’ll see in the next sections, this isn’t necessarily the taxable gain as there are deductions and allowances to consider.

Capital Gains Tax (if Selling an Inherited Property) Example

On the other hand, if you put it on the market immediately and it sells within a few months for £400,000, you wouldn’t need to pay any capital gains tax.

Tax Rates

The rate of capital gains tax depends on your tax band.

Those in the basic rate income tax band (from £12,571 to £50,270 in 2024) pay 18% on their gains from residential properties. They also pay 10% on other chargeable assets:

  • Business assets
  • Shares (not in a PEP or ISA)
  • Main home that’s been let out or used for business
  • Property that isn’t your main game
  • Personal possessions worth at least £6,000 (excluding a car)

Meanwhile, higher or additional taxpayers (who earn above this amount) pay 24% on their gains from residential properties. They must also pay 20% on other chargeable assets.

However, this doesn’t apply to houses that aren’t the primary residence.

Deductions Against Capital Gains Tax for Inherited Property

You’re allowed to make deductions from the profit you make from a house sale. After deductions, your total gains may be below the threshold for paying capital gains tax.

Using the example above of an inherited property initially worth £400,000, you will likely have to spend a few thousand on expenses.

Allowable deductions include:

  • Renovations (such as a bathroom or kitchen installation)
  • Additions to the home (such as an extension)
  • Estate agency fees
  • Solicitor fees
  • Survey fees
  • Auctioneer fees
  • Advertising costs when selling a house

However, you cannot deduct:

  • Maintenance costs
  • “Home improvements” that don’t add value to the property
  • Replacements that are a similar standard to the previous fittings
  • Maintenance of a “do-upper” (a house bought in poor condition that is then done up to a good standard).

Deductions Against Capital Gains Tax for Inherited Property

Whatever the deductions are, you’ll need to provide receipts to claim them. It’s also a good idea to seek out a professional house valuation both before and after making the upgrades, which can prove that the improvements did add value.

Capital Gains Tax Allowance

Everyone has an annual capital gains tax allowance, which further reduces the tax paid.

This changes every year, but the allowance for the 2024-2025 tax year is £3,000.

Couples can combine their tax allowance as long as they live together.

This means that you can deduct both the tax-free allowance and deductions from total profits paid, and you’ll only have to pay tax if the resulting number is positive.

However, if negative, the government doesn’t have to pay you – instead, you’ll simply owe no capital gains tax. You also can’t combine tax allowance from previous tax years.

To use your allowance, you can’t have used it already on other assets. If you have, the amount used already should be deducted from your full allowance.

Capital Gains Tax When Inheriting Property Example Calculations

Now, let’s pull all this together.

Lower Rate Taxpayer Example

Capital Gains Tax When Inheriting Property - Lower Rate Taxpayer Example

Let’s return to the above mentioned case where someone inherits a house for £350,000 and sells it for £400,000 a year later. That’s a gain of £50,000.

The person inheriting the property earns £30,000 a year, meaning they’re in a basic rate tax band. This means they’ll face a tax rate of 18% when they pay CGT.

Since they haven’t used up any of their capital gain tax allowance yet, they can deduct £3,000.

They also incurred the following deductions:

  • Legal costs: £4,000
  • Estate agent costs: £6,000
  • Surveying costs: £1,000
  • House renovation costs: £10,000 for a new kitchen

This adds up to a total of £21,000.

The total CGT payable is therefore £50,000 minus £21,000 minus the allowance of £3,000, which leaves £26,000.

The total CGT payable is £4,680 (26,000 multiplied by 0.2).

Higher Rate Taxpayer Example

Capital Gains Tax When Inheriting Property - Higher Rate Taxpayer Example

Now, let’s say that the person inheriting property in the example above earns £60,000, making them a higher-rate taxpayer.

This is where things get a bit more complicated. Just as someone earning £60,000 doesn’t have to pay 40% on all their income, the same applies to capital gains tax. You only have to pay the higher rate of CGT tax on the same portion of your gains as you earn above the tax threshold.

In the example above, since the threshold to be a higher-rate taxpayer is £50,270, they’re £9,730 over the threshold. Therefore, the 40% rate is only payable on this £9,730, which is £3,892.

The other £16,270 (£26,000 minus £9,730) is taxed at the 20% rate, which is £3,254.

Therefore, the total CGT tax owed is £7,146 (£3,254 plus £3,892).

Bear in mind that the tax bands for higher rate and basic rate taxpayers may change in a tax year, so it’s wise to check this with HMRC before calculating capital gains tax.

Capital Gains Tax on Inherited Property Calculator

Want to work out capital gains tax owed on an inherited property without the math? Use our capital gains tax calculator to do the work for you.

When is the CGT Payment Deadline?

As mentioned, there’s no need to immediately pay tax after inheriting a property. You also have two years to tell HMRC which house is your primary residence.

Otherwise, HMRC determines this when you sell one of the homes.

After selling a residential property, you have 60 days to report gains to HMRC and pay CGT (with the 60 days beginning once the sale is completed). You can do this on the HMRC website or send a paper form.

If there’s a further balance, you will pay this by self-assessment on the 31st January.

But if you’re selling a non-residential property, you can wait until the 31st December to report your gains. You will then pay the amount on the tax deadline of 31st January through a self-assessment tax form.

Deductions Against Capital Gains Tax for Inherited Property

What If I Want to Rent Out an Inherited Property?

If you rent out your inherited property, you cannot have it as your primary residence, which means you will have to pay capital gains tax when you decide to sell it.

However, while you’re still renting out the house, you won’t need to pay CGT.

You’ll generally also have tax to pay on any rental income.

What About Trusts?

Sometimes, people with high-value estates who want to transfer their assets to a beneficiary without them incurring excessive taxes will do so via trust.

In this case, trustees are responsible for paying taxes, not the beneficiary.

If the beneficiary wants to withdraw some or all of the assets (and they are able to tell the trustees what to do with the assets) then the trustees will pay the tax on their behalf. This is based on the market value when the beneficiary was entitled to the trust.

However, if the trustee transfers the assets to the beneficiaries, the trustee will only pay tax when they sell. This is known as hold-over relief.

Trustees have a tax-free allowance of £1,500 that they can withdraw each year. There’s also £3,000 in the case of vulnerable beneficiaries (such as those who are disabled or who had a parent die).

What About Gifting the Property?

If you gift the property to someone else immediately after you inherit it (before it can increase in value), this creates a situation similar to if you had sold it yourself and sold it immediately, meaning there’s no need to pay tax.

But if it does increase in value after you inherit it, then gifting it to someone else isn’t some magical loophole that allows you to avoid capital gains tax, unless you gift the property to a charity.

Capital Gains Tax During Probate

Probate is the period during which it is determined whether the person who passed away has a valid will, who will administer their estate, and what will happen to the assets. The Executor of a will or the Administrator (in the absence of a will) has to pay inheritance tax, and capital gains tax if applicable.

However, if they transfer assets to a recipient before they are sold, the recipient becomes responsible.

What Other Items May I Need to Pay Capital Gains Tax On?

As well as inherited property, the following items may be classed as “chargeable assets” and therefore subject to capital gains tax:

  • Jewellery
  • Paintings
  • Antiques
  • Coins
  • Stamps

Get Those Affairs in Order

Overall, you will face capital gains tax on inherited property if the total estate is worth at least £325,000, it increases in value since you inherit it, and you decide to sell it. The main exception to this is if you make the house your primary residence. However, there are a few ways to reduce your tax burden, such as transferring assets to a partner and using your capital gains allowance.

If you’ve recently inherited a property you don’t want to live in as your main property, you may be looking for a way to sell the house quickly so you can move on with your life. Property Solvers offers a property buying service that allows you to secure an instant sale instead of waiting for a buyer.

Disclaimer

Property Solvers are not tax advisers, and the information provided should not be considered as tax advice.

For specific guidance tailored to your individual circumstances, we strongly recommend consulting a qualified tax professional and/or accountant.