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Inherited homes and the taxes you may need to pay

published on 06/07/2018  


Inheritance Tax

If you find yourself the owner of a property that you’ve inherited, you may have to pay inheritance tax. Inheritance tax is payable if you inherit an estate that’s worth more than £325,000. Or, £450,000 if the house was left to children or grand-children.

This doesn’t apply to property left to a husband, wife or civil partner. It only applies if you are a friend, or a family member such as a sibling or a cousin.

The inheritance tax threshold is 40%. This is what you will have to pay after the deduction of the tax-free threshold. For example, your children have been left a flat with a market value of £750,000 by their grand-father. The tax-free threshold is £450,000. Deduct this from the market value of £750,000 and you will have to pay 40% tax on the sum of £300,000. That’s £120,000.

You will pay inheritance tax even if you sell your property to your child at a loss while you are alive. The money will be regarded as a gift. All gifts are subject to a 7- year rule. For example, if the gift is given between 1 and 3 years of your relation dying you will still have to pay 40%. It will be calculated from the market value at the time of the owner’s death.

This is called taper relief and it’s on a sliding scale: If you were given a gift:

Less than 3 years before the owner died you pay 40%

3 to 4 years you pay 32%

4 to 5 years you pay 24%

5 to 6 years you pay 16%

6 to 7 years you pay 8%

7 or more and you don’t pay anything

Capital Gains Tax

If you decide to sell the home you’ve inherited, you may have to pay capital gains tax. This covers the profit you make on the sale. This is the difference between the amount the property is valued at the time of the owner’s death and the amount you get once it is sold.

There is tax relief on capital gains. The tax allowance for an individual is £11,700 and for a married couple it is £23,400. Therefore, if you sold the property which was worth £750,000 for £800,000. Plus, it cost £5,000 in selling costs your gain would be £45,000.

If you then take off the tax allowance of £11,700, you are left with a profit of £33,300. This is the sum that will be taxed. How much you pay will depend on how much taxable income you have unless you are a higher rate income tax payer. In this case you will pay 28%.
  Tags: Inheritance, Tax, Property