Inherited property is defined as a property that is gifted by the owner once they have passed away.
When inheriting a property, you may be unsure what to do and whether you have extra costs to pay. There are various costs to consider such as conveyancing fees, legal fees and taxes, depending on what you plan on doing with the property.
Understanding the legalities involved will ensure that you are better prepared, especially when it comes to how much tax you will owe. Here are some tips to help you deal with an inherited property
1. Decide if you want to live in, sell, or rent the property
The first thing you’ll need to think about is whether you wish to live in, sell, or rent out the property. This is the most important decision you’ll need to make when dealing with your inherited property. There are many factors that can impact your decision, so it’s crucial to take your time.
If the property has been gifted to you without a mortgage, then you’re able to live in the property with no issues. However, if the property comes with a mortgage, you will need to pass the appropriate affordability checks if you plan on living in it.
If you wish to sell the property, you may be subject to high tax payments, depending on the value of the property and the combined estate.
If you wish to rent out the property, you should be prepared to pay income tax. The amount of income tax you pay will be dependent on your total income.
2. Going through probate
Regardless of whether you decide to buy, sell, or rent, you’ll need to go through probate. Probate is the term given to the legal proceedings when the deceased’s affairs are arranged by their executor. The executor will pay any bills or taxes owed by the deceased at the time of death.
Probate can be an extremely lengthy process, especially if it’s a difficult case. Therefore, it’s best to use this time to reflect on what you want to do with the home.
3. Paying the appropriate taxes
Depending on what you decide to do, there are various taxes that you may have to pay. Here are the main types of tax you should know about:
Capital Gains Tax
If you inherit a property from your spouse or civil partner, then you will not have to pay Capital Gains Tax if you decide to live in the property.
Capital Gains Tax will be owed if you sell the property. The amount you pay increases between the date you inherit the property and the date you sell. This means that the longer it takes to sell the property, the more Capital Gains Tax you will pay.
Income Tax
If you inherit a buy-to-let, holiday let, or decide to rent out the property, you will need to start paying income tax when you start to receive income. This is because you will be earning a higher level of income and will need to make sure that you’re paying the correct amount of tax.
Inheritance Tax
Lastly, it’s important to learn whether you owe any inheritance tax. Inheritance tax is owed when the deceased’s combined estate is worth more than £325,000. However, if a property is left to a spouse or civil partner, there is no inheritance tax to pay.
If the deceased leaves property to their children or grandchildren, the tax-free threshold increases from £325,000 to £450,000. This is only the case if the combined estate is valued at less than £2 million.
Inheritance tax is set at a standard fixed rate of 40% which is based on the combined value of the estate. This means that the value of the property is considered alongside other assets and investments. It must be paid by the end of the sixth month after the date of death.
4. Instructing a chartered surveyor
As soon as you’re given the property, it’s best to instruct a chartered surveyor. A chartered surveyor will be able to value the property as well as conduct examinations to ensure that there aren’t any structural defects.
Whether you plan on living in the property or wish to rent or sell, a surveyor will be able to spot defects or any environmental or construction issues.
5. Inform your local council
If you plan on leaving the property unoccupied for a certain period of time, then you should inform your local council. This is because the council may reduce your total tax liabilities, meaning you can save some money if you don’t plan on living on the property full-time.
Bear in mind that changes made in Wales mean that those with unoccupied second homes will see an increase in council tax payments. Therefore, it’s best to discuss this with your local council to see how much you are expected to pay in council tax for the property.
