What to Know About Selling Inherited Property

Selling Inherited Property

In this guide, we will discuss everything you need to know about selling your inherited property, including how to sell it, what taxes you might encounter and how to avoid inheritance tax on your property. This way, you’ll be able to look at your options and make a decision that’s right for you.

The first step is to decide whether you want to sell the property or keep it. (For some, due to tax constraints, keeping the property for a while before selling is the better choice.) If you decide to sell it, the next step is to find a reliable estate agent or property buyer and work with them to sell your property at a comfortable price.

How do I sell an inherited property?

Inheriting a property can be an emotional time as you’ll be looking at making decisions about a home where you potentially no longer live or a home that’s far away.

Chances are if you have recently inherited a property, you won’t need to make any big decisions right away, as probate tends to take time. This is a good moment to reflect on your options and decide whether you want to keep or sell the property in question.

Also, technically until a property is transferred over to you, there’s not a lot you can do other than think about what you’d like to do. (Also, if there are multiple inheritors, then you need to ensure that a joint decision is made about whether it should be sold, what price it should be listed at etc.)

Once the property is officially yours, there are a few things you’ll need to address before you can sell it. If the inherited property still has an unpaid mortgage, you should work with your solicitors to settle any outstanding costs before you think about selling it.

Otherwise, if the mortgage has been paid in full, you can move ahead and start the process of selling. It follows mainly the same process you’d see selling any other property in terms of instructing estate agents and having them advertise your home and negotiate offers. Once you have found a buyer, you will need to work with a solicitor or conveyancer to complete the legal paperwork and transfer ownership of the property to the new owner.

However, there are a few differences between selling an inherited property and a regular one. The main ones are Inheritance tax and Capital Gains tax.

What tax do I pay if I sell an inherited property?

If you sell an inherited property in the UK, you may be required to pay tax on any profit you make from the sale. There are two types of tax you might owe:

Capital Gains tax (CGT) on inherited property: If the value of the property has increased since the date of inheritance, you may owe CGT on the profit you make when you sell the property. CGT is currently charged at a rate of 18% or 28%, depending on your income level. You can claim an annual CGT allowance, which is currently £12,300 (for the tax year 2022/23). This means that if your total capital gains for the year are below this amount, you will not owe any CGT.

Inheritance tax (IHT) on inherited property: If the property’s value is above the inheritance tax threshold, you may owe IHT. Inheritance tax is currently charged at a rate of 40% on the value of the property above the threshold. The IHT threshold is currently £325,000 per person (for the tax year 2022/23). If the property is worth less than this amount, you will not owe any IHT.

Stamp duty is not a cost you’ll need to pay when inheriting a property, but you should be aware what you decide to do next following inheriting a property could change this. However, if you buy out any shares from your inherited home or sell the inherited home and then invest the money back into a buy-to-let property, the second property could be subject to stamp duty.

How do I avoid inheritance tax on my property?

If you're worried about the potential IHT liability on your inherited property, there are several ways you can reduce or avoid it altogether:

• Gift it: You can give the property away as a gift to your children or other beneficiaries. If you, the gifter, live for seven years after making the gift, it will be free of IHT. (This is also commonly referred to as the seven-year rule.)

• Set up a trust: You can set up a trust to hold the property and pass it on to your beneficiaries without incurring IHT. However, this can be a complex process, and you will need to work with a solicitor or financial advisor to set it up correctly.

• Take out life insurance: You can take out a life insurance policy to cover the potential IHT liability on your property. This can be an effective way to ensure that your beneficiaries receive the full value of the property without having to pay any IHT.

• Leave the property to your spouse or civil partner: There is no IHT on assets left to a spouse or civil partner, so leaving the property to your spouse or civil partner can be an effective way to avoid IHT.

• Use the IHT threshold: You can use this to your advantage by leaving other assets to your beneficiaries instead of the property. For example, if you have additional assets worth £325,000, you can leave them to your heirs and leave the property to your spouse or civil partner, who will not incur IHT.

• Make use of reliefs: There are several reliefs available that can reduce or eliminate the IHT liability on your property. For example, if you have lived in the property for at least two years before you die, your beneficiaries may be able to claim relief under the residence nil rate band, which can reduce the IHT liability on the property.

It's important to note that IHT rules can be complex, and the best course of action will depend on your specific circumstances. If you're unsure about how to reduce or avoid IHT on your inherited property, it's a good idea to seek advice from a solicitor or financial advisor who specialises in IHT planning.

Is it better to keep or sell an inherited property?

There are a variety of factors that can impact this, and you should consult legal advice to ensure that you’re making the right choice, given your circumstances.

If you want to sell your inherited property fast, it’s important to understand that even in typical probate cases, it can sometimes feel like a slow process. (More so if probate is contested, if there are issues with executors or if the deceased person’s will was particularly complex.)

However, if you want to sell up as soon as possible, there are some avenues you can explore, such as selling your property via auction (just be mindful that this doesn’t guarantee your house will sell, even if it seems quicker), renting, or simply accepting the tax cut, can help to move things along faster. Vacant properties can be attractive to potential buyers as there’s less waiting around, but it’s also important to remember the state of the property will also impact how quickly it will sell. If it’s in good condition, it may sell quickly, whereas houses that need significant renovation work may take longer.

Alternatively, if taking a significant tax hit isn’t viable for your circumstances, living in the property and keeping it could be a more cost-efficient option. Deciding to live in it as your main residence means you may be able to claim relief from CGT when you sell it. This is called principal private residence relief (PPR), and it can reduce or eliminate your CGT liability.

Considerations on selling your inherited property

Selling an inherited property is a straightforward process, but it's important to understand the potential tax liabilities and how to avoid them. If you decide to sell your inherited property, you will need to work with an estate agent or property buyer and a solicitor or conveyancer to complete the legal paperwork.

If you sell the property for a profit, you may owe CGT on the gain, and if the property’s value is above the IHT threshold, you may owe IHT. However, there are several ways to reduce or avoid IHT, including making a gift, setting up a trust, taking out life insurance, leaving the property to your spouse or civil partner, using the IHT threshold, and making use of reliefs. It’s worth considering these carefully to ensure you get the best value out of your estate.

If you're unsure about how to sell your inherited property or how to reduce or avoid IHT, it's a good idea to seek advice from a solicitor or financial advisor who specialises in these areas. You’ll be able to make informed decisions and maximise the value of your inherited property for yourself and your beneficiaries.

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