What Tax Do You Pay If You Inherit Property?

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Tax can be confusing, which is why so many people worry about tax they might have to pay on gifts left to them by someone who has died.

Inheritance tax (IHT) and Capital Gains Tax (CGT) are the main issues for someone inheriting valuable possessions or property – but the worries are not necessary.

The deceased’s estate pays any IHT due, and although this is a weight off the mind of anyone receiving an inheritance, IHT will reduce the amount they receive.

CGT is not generally a problem either.

CGT is paid on any profit made when gifts like shares or a property are sold.

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Sharing ownership

In the short term, the value of an inheritance is unlikely to have gone up much if the item is quickly sold – and even if the price does rise, everyone has an annual CGT-exempt personal allowance. In the 2018-19 tax year, this will is £11,700.

Married couples can share ownership and take advantage of two annual exempt amounts.

Another little known IHT rule can come into play as well.

If someone inherits a property that goes down in value, they can claim overpaid IHT back.

Sale of Land Relief applies if the person paying IHT sells a property no later than 48 months after a death and the value has decreased by no less than 5% or £1,000, whichever is lowest, since IHT was calculated.

Reducing the tax bill

Be careful if you make a sale of land relief claim – HM revenue & Customs will look at other sales made by the estate, if there are any, and can claim more tax if the value of any property has increased.

Sale of land relief claims are made on a special HMRC form.

The HMRC IHT manual for tax inspectors gives an example of how the relief works:  “T died in August 1988. T’s house was valued for probate at £200,000. T had no other interests in land. In December 1990, T’s executors sold the house for £150,000 to someone who was not related to T. The executors claimed sale of land relief and the date of death value of the house for IHT purposes was reduced to £150,000.”

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