Inheritance can be a complex issue, particularly when it comes to understanding the tax implications. One of the most common questions that arise when someone inherits a property in the UK is whether capital gains tax (CGT) applies. As of 2023, the rules around CGT on inherited property have undergone some changes, so it’s essential to be updated.
What is Capital Gains Tax?
Before delving into the specifics of inheritance, it is worth quickly explaining what capital gains tax is. Essentially, CGT is a tax on the profit when you sell or dispose of something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive. Assets subject to CGT include personal possessions worth £6,000 or more, apart from your car, and property that’s not your main home.
The Basic Rule: No CGT Upon Inheritance
Firstly, it’s important to note that when you inherit property, no immediate capital gains tax is due. This is because inheritance tax (IHT) and CGT are two separate entities. IHT is potentially payable by the estate of the person who died, while CGT is paid by the person who benefits from the asset later down the line.
Capital Gains Tax Upon Disposal of Inherited Property
While there is no CGT due at the point of inheritance, it could become relevant if you decide to sell the inherited property. If the property has increased in value from the time you inherited it to the time you sell it, then you may have to pay CGT on the gain.
The amount of CGT you’ll pay depends on your tax rate and the amount of the gain. As of 2023, for basic rate taxpayers, the CGT rate is 18% on residential property and 10% on other assets. For higher and additional rate taxpayers, it’s 28% on residential property and 20% on other assets.
The Role of Probate Value
The “probate value” of the property plays a crucial role in determining the amount of CGT due. This is the market value of the property at the date of the deceased’s death. When you sell the property, the probate value is used to calculate the gain or loss. If the selling price is higher than the probate value, you will have a gain. If it’s lower, you will have a loss.
Exemptions and Reliefs
There are certain exemptions and reliefs available that may reduce the CGT payable. For example, everyone has an annual tax-free allowance, known as the Annual Exempt Amount. For the 2023 tax year, this is £12,300. This means you only have to pay CGT on gains above this amount.
There are also specific reliefs that might apply, such as Private Residence Relief if you live in the property before you sell it. Other reliefs might also apply depending on the specific circumstances around the property and its use.
How Do You Calculate Capital Gains on Inherited Property in the UK 2023?
The process of inheriting property can be a complex one, laden with many financial considerations. One of these is the potential tax implications, including the calculation of capital gains tax (CGT). In the UK, the process has several steps that one needs to follow.
Understanding Capital Gains Tax (CGT)
The first step in understanding how to calculate capital gains on inherited property is to understand what Capital Gains Tax is. CGT is a tax on the profit or “gain” made when you sell a capital asset, such as a house or a piece of land. This gain is the difference between the purchase price of the asset and its selling price. However, in the case of inherited property, the purchase price is considered the market value of the property at the time of the original owner’s death.
If you inherit a house in the UK, Capital Gains Tax will be payable if you decide to sell the inherited property and you make a profit from the sale. CGT is payable on any amount you make above the value of the property when you inherited it, minus any allowable deductions.
Calculating Capital Gains
The calculation of capital gains on an inherited property involves several steps:
Step 1: Calculate the Total Gain
The total gain is the difference between the value of the property when you sold it and the value of the property when you inherited it, minus all costs associated with the sale, including improvements. The formula is as follows:
Total gain = Value when you sold the property – Value of the property when you inherited it – All costs (including improvements)
Step 2: Determine Your Capital Gains Allowance
The UK has a capital gains tax allowance, which is the amount of profit you can make from an asset in a tax year before any CGT is payable. For the 2022/23 tax year, the capital gains tax allowance is £12,300. If you do not use your CGT allowance in a given tax year, it cannot be carried forward to the next tax year.
Step 3: Calculate Your Taxable Gain
Your taxable gain is your total gain minus your total deductions (which includes your capital gains tax allowance if you haven’t used it yet).
Taxable gain = Total gain – Total deductions
Step 4: Determine Your Tax Rate
The tax rate for your capital gains depends on your income tax bands. If you’re a higher-rate Income Tax payer, you’ll pay 28% on your gains from selling an inherited home. If you pay basic rate Income Tax, the rate you pay will depend on the size of your gain and your taxable income.
Step 5: Calculate Your Capital Gains Tax
Finally, calculate the total CGT payable by multiplying your taxable gain by your tax rate. The formula is as follows:
Total CGT payable = Taxable gain * Tax rate
Calculating the capital gains on inherited property in the UK can be a complex process, but understanding the steps can help to simplify it. It’s important to remember that this is a general guide and individual circumstances can vary. Therefore, it’s always a good idea to seek professional advice when dealing with tax matters.
In conclusion, while there is no capital gains tax payable at the point of inheritance, it can become relevant if you sell the property and it has increased in value. The rules can be complex, and the specifics will depend on your individual circumstances, including your tax rate and any reliefs you may be eligible for. It is always advisable to seek professional advice to ensure you are meeting your tax obligations and taking advantage of any reliefs available to you.
Please note: tax laws are subject to change, and the above information is accurate as of the UK tax year 2023. Always check the most recent tax laws
Capital Gains Tax Calculator for Inherited Property in the UK 2023
Case Study: Calculating Capital Gains on Inherited Property in the UK 2023
Capital Gains Tax (CGT) is a tax levied on the profit made when you sell or dispose of capital assets in a tax year. In the context of inherited property, CGT becomes payable if you decide to sell the inherited property and make a profit from the sale. The tax is calculated on any amount you make above the value of the property when you inherited it, minus any allowable deductions.
Let’s consider the case of Emma, who inherited a property and decided to sell it. The property was valued at £150,000 when she inherited it. Emma sold the property for £250,000. She spent £1,000 on estate agents’ costs, £2,000 on solicitors’ costs, and £10,000 on adding a garage to the property before selling it.
Calculating Total Gain
Emma’s total gain is calculated as follows:
Total gain = Value when you sold the property – Value of the property when you inherited it – All costs, including improvements
So, Emma’s total gain = £250,000 – £150,000 – £1,000 – £2,000 – £10,000 = £87,000
Considering Capital Gains Allowances and Deductions
For the 2022/23 tax year, the Capital Gains Tax allowance is £12,300. This is the amount of profit you can make from an asset in a tax year before any CGT is payable. Emma hadn’t yet used any of her CGT tax allowance for the tax year, so her total deductions = £12,300.
Working Out Taxable Gain
Taxable gain = Total gain – Total deductions
In Emma’s case, this would be £87,000 – £12,300 = £74,700
Determining Tax Rate and Calculating CGT
The tax rate will be based on your Income Tax bands. In the 2022/2023 tax year, the standard Personal Allowance is £12,570. Emma earns £30,000. She would need to deduct any income above £12,570 (her personal allowance for 2022/23) from £37,700 (the basic rate tax band) to see how much of the capital gains will be multiplied by the basic CGT rate of 18%. Any amount above £37,700 will be taxed at 28%.
So £30,000 (Emma’s income) minus £12,570 (Emma’s personal allowance) = £17,430. Deducting this amount from £37,700 gives £20,270. This is the amount of Emma’s gains that will be multiplied by the basic CGT rate of 18%. The remaining amount is multiplied by the higher 28% tax rate, as follows:
- The first £20,270 of the taxable gain is multiplied by 18% tax rate = £3,648.60
- The remaining £54,430 taxable gain is multiplied by 28% tax rate = £15,240.40
So, Emma’s total tax to pay = £18,889
This case study illustrates how to calculate the Capital Gains Tax on inherited property in the UK for the tax year 2022/2023. It’s important to note that the rates and allowances may vary each tax year.
How a Tax Accountant like Total Tax Accountant Can Help You with Capital Gains Tax on Inherited Property in the UK
Inheriting a property can be a complex process, especially when it comes to understanding and managing the tax implications. Capital Gains Tax (CGT) is one such tax that can apply when you sell an inherited property. A professional tax accountant, such as Total Tax Accountant, can provide invaluable assistance in navigating these complexities, ensuring you meet your tax obligations while also taking advantage of any allowances or reliefs.
Understanding Capital Gains Tax
Capital Gains Tax is a tax on the profit made when you sell or dispose of an asset that has increased in value. In the context of inherited property, CGT is calculated based on the increase in the property’s value from the time of inheritance to the time of sale. Understanding the nuances of CGT can be challenging, but a tax accountant can help you comprehend how it applies to your situation, calculate your potential liability, and advise on strategies to minimise the tax.
Accurate Valuation of Inherited Property
One of the key aspects of calculating CGT on inherited property is determining the property’s value at the time of inheritance. This is known as the ‘base cost’ and is used to calculate the gain (or loss) when the property is sold. A tax accountant can guide you through this process, helping you obtain a professional valuation if necessary, and ensuring the base cost is accurately established.
Claiming Allowances and Reliefs
The UK tax system provides certain allowances and reliefs that can reduce your CGT liability. For instance, everyone has an annual tax-free allowance, known as the Annual Exempt Amount. There are also specific reliefs, such as Private Residence Relief, that may apply if you lived in the inherited property as your main home. A tax accountant can help identify which allowances and reliefs you’re eligible for, ensuring you claim them correctly to reduce your tax bill.
Completing and Filing Tax Returns
When you sell an inherited property and have to pay CGT, you’ll need to report this to HM Revenue and Customs (HMRC), usually through a Self-Assessment tax return. This process can be complex and time-consuming, especially if you’re not familiar with the tax system. A tax accountant can take this burden off your shoulders, completing and filing the tax return on your behalf, ensuring it’s accurate and submitted on time to avoid penalties.
Planning for Future Tax Efficiency
In addition to helping with immediate CGT obligations, a tax accountant can also provide advice on future tax planning. This could involve strategies for reinvesting the proceeds from the property sale, estate planning, or advice on buying and selling other properties. By considering your overall financial situation and long-term goals, a tax accountant can provide personalised advice to help you manage your finances in a tax-efficient manner.
Inheriting a property can bring about significant tax implications. While it’s possible to manage these on your own, the complexities of the UK tax system can make it a daunting task. A tax accountant like Total Tax Accountant can provide the expertise and support you need, helping you navigate the tax system, meet your obligations, and make informed decisions to manage your tax liability. Whether it’s understanding CGT, claiming allowances, filing tax returns, or planning for future tax efficiency, a tax accountant can be an invaluable ally in managing your inherited property.