Inheriting property once a loved one has passed on can be a bittersweet experience. It represents a thoughtful gesture, while also raising a variety of legal and financial questions that can be difficult to wrap your head around. How do you put it under your name? What taxes do you pay? What happens to the mortgage?
Sorting through this legal minefield can understandably be overwhelming, especially during a period of grief. Understanding the key considerations when inheriting property can make this process easier, however, you can always seek Inheritance Tax advice from financial advisors if you need extra assistance.
Probate and inherited property
Probate is typically the first hurdle you’ll encounter when inheriting property. The asset technically isn’t yours until probate is complete – this is where executors pay off any outstanding debts, tax and distribute assets to beneficiaries according to the Will.
The probate process can take anywhere from a few months to a year to complete, depending on the complexity of the estate. Until it’s finished, you won’t be able to make any significant changes to the property or sell it.
Houses with mortgages
If the property you’re inheriting has an outstanding mortgage, you may face some added complications. This will depend on the specifics laid out in the Will and whether the deceased had life insurance that cleared the mortgage.
The responsibility for the remaining payments typically falls to the estate (meaning it will be paid before any assets are distributed) but the executor may have decided to transfer the mortgage to you. You will need to assess your financial situation carefully to see if you can feasibly take on this responsibility.
Inheritance Tax
Inheritance Tax (IHT) is a tax on the total value of the estate of the deceased. The standard rate is 40% and is only charged on the part of the estate that is above the tax-free threshold. This is currently set at £325,000. Most inherited properties don’t reach this threshold and are exempt. In fact, the latest figures show that less than 4% of estates pay inheritance tax.
Some exemptions and reliefs can be applied to reduce your IHT liability, including lifetime gifts and trusts. It’s best to speak to a tax advisor to see whether you owe any IHT and explore strategies to minimise its impact.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax levied when you want to sell the asset you’ve inherited, and you’ll only have to pay it if you go through the sale for a higher price.
When you inherit a property, you get an inheritance uplift. Essentially, it’s assumed that the property has the same market value as it did on the date of the deceased’s death. If you sell the asset for the same price, you won’t be charged CGT.
Tax is subject to an individual’s personal circumstances and tax rules can change at any time.
The Financial Conduct Authority do not regulate, Will Writing, Tax Advice and Estate Planning.
The guidance and/or advice contained within the website are subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK. This material is not a personal recommendation or financial advice.