Do you pay capital gains tax on an inherited property?

Executors usually meet this tax late, after a sale has already been agreed, and are surprised by it. The decision that governs the whole bill was made months earlier, by them, when the property was valued for probate.

Almost everything else follows from that one figure. The rate is fixed, the allowance is fixed, and the deductions are a short list.

What follows is what is actually taxed, why the valuation decides it, who the taxpayer is and how that can legitimately be changed, and the deadline that catches people out.

What exactly is taxed when an inherited property is sold?

Not the inheritance. Inheriting a property is not a disposal, so nothing is due at that point, and inheritance tax is a separate question handled by the inheritance tax calculator.

What is taxed is the gain between the date of death and the date of sale. Section 62 of the Taxation of Chargeable Gains Act 1992 treats the estate as having acquired the property at its market value on the day the person died, so that figure becomes the base cost.

The consequence is worth stating plainly. If the property is valued at £300,000 for probate and sells for £310,000, the gain is £10,000, not £310,000. If it sells for £300,000, there is no gain and no tax, however much the house is worth and however long it had been owned.

Why does the probate valuation matter so much?

Because it is the only number in the calculation the executor sets, and it is set long before the tax is due.

A valuation pitched low can look harmless while the estate is under the inheritance tax threshold, since nothing turns on it then. It stops being harmless the moment the property sells, because every pound between that figure and the sale price is now a taxable gain. A valuation pitched high does the reverse, and where inheritance tax is payable it raises that bill instead.

How to value a property for probate sets out what HMRC expects and when a formal valuation is worth paying for.

Who pays, the estate or the beneficiaries?

This is the decision most often missed, and it is usually worth money.

• The estate sells. The executors are the taxpayer. The estate has one annual exempt amount to set against the gain, and residential property is taxed at the higher rate regardless of what any beneficiary earns.
• The beneficiaries sell. If the property is transferred to them first, each beneficiary has their own annual exempt amount and their own rate. Four beneficiaries means four allowances rather than one.

Transferring the property to beneficiaries before the sale is called appropriation. It is a routine step, not a scheme, but it has to happen before contracts are exchanged to have any effect. Where there are several beneficiaries and a real gain, it is the single largest legitimate saving available, and it is worth taking advice on before the property is marketed.

A beneficiary who actually lives in the property may also qualify for private residence relief, which the estate can never claim.

What can the estate deduct from the gain?

• The probate valuation. The market value at the date of death is the base cost. Everything the tax is calculated on is measured from this figure, which is why getting it right matters more than anything else here.
• The costs of selling. Estate agent fees, auctioneer commission and the legal costs of the sale come off the gain. Keep the invoices, because HMRC can ask for them.
• Improvements, not repairs. An extension or a new kitchen where there was none adds to the base cost. Redecorating, fixing a roof or clearing the house does not, however necessary it was.
• Some valuation costs. HMRC allows personal representatives a deduction for the cost of establishing title and valuing the estate, either on its published scale or, where the actual cost is known, that figure instead.

What rate is charged, and what is left untaxed?

Personal representatives pay 24% on gains from residential property. There is no lower band for an estate: the rate does not depend on what the deceased earned or what the beneficiaries earn.

Against that, the estate has the annual exempt amount, currently £3,000, and it has one for the tax year of the death and the two tax years after it. An estate still holding a property in the fourth tax year after the death has no allowance left at all, which is one more reason that a property left standing empty costs the estate money.

Both figures move at fiscal events. Check them against GOV.UK capital gains tax rates before relying on either.

When does it have to be reported and paid?

Within 60 days of completion, on a UK property disposal return, separately from any self assessment return. The tax is payable in the same window.

This catches executors out more than any other part of it, because it is far shorter than the inheritance tax timetable they have just been working to, and it runs from completion rather than from the end of the tax year. Interest starts accruing immediately after the 60 days, and penalties follow.

How can an estate reduce the bill legitimately?

Three things, none of them aggressive.

Sell close to the probate valuation, and the gain is small by construction. Where the property sells for less than the probate value within four years of the death, the estate can claim loss relief on the sale of land and reclaim inheritance tax on the difference, which is a separate relief worth knowing about.

Appropriate the property to beneficiaries before exchange, so several annual exempt amounts apply instead of one.

And do not let the property sit. Delay is what turns a nil gain into a taxable one, and what an inherited property costs sets out what the holding costs are while it does.