Selling Inherited Property – The Ultimate Guide
Selling an inherited property can be a daunting prospect at the best of times. First there’s the emotional impact of dealing with the loss of a relative or friend. And then there’s the legal responsibilities, paperwork and financial matters to consider.
More often than not, inheriting a house will mean you having to carry out a good deal of research. This will include discovering if a will has been left and how to apply for probate. You’ll also need to research inheritance tax, capital gains tax and importantly, what to do next.
But don’t despair – our Ultimate Guide has been written with the sole aim of putting all of the information you’ll ever need right at your fingertips. Read on to understand the in’s and out’s of selling an inherited property today. Alternatively, simply choose from one of the quick navigation links below to get straight into a subject.
Quick Page Navigation
- The initial costs of inheriting a property
- The three types of inherited property taxes
- What is inheritance tax for property?
- What is the inheritance tax rate for property?
- How to avoid inheritance tax on property
- Capital gains tax for property
- How to avoid capital gains tax on property
- Income tax on inherited property
- 6 steps to selling an inherited property
- Sell your inherited property
- How to sell an inherited property
The initial costs of inheriting a property
Mortgages & loans
Often when a property is inherited, mortgages and loans will have already been paid off during a lifetime of ownership. However, this isn’t always the case. Occasionally a property will have been left with a mortgage or loan outstanding meaning monthly payments will continue to fall due. In this case it will be important that you speak to all lenders as soon as possible to advise them of the circumstances. Lenders may still ask you to make appropriate plans to continue making payments. Alternatively, they may set up a payment holiday for you allowing you time to make a good number of decisions. This could really help at a time when you’re least expecting the additional burden of loan payments.
Properties that are left empty often deteriorate in some way or other. An empty house can become damp and attract pests. Properties can also attract anti-social behaviour such as vandalism, arson or even squatting.
For all of these reasons you’ll need to put a good buildings insurance policy in place. If the property is to remain unoccupied for any length of time you’ll need to make the insurers aware of this. Almost all insurers will ask that you turn off the water stopcock, gas and electricity supplies for safety reasons. They may also ask you to carry out regular property inspections checking for condition and overall security. In this case we’d advise that you take photographs of each visit for your records.
As with all property there is always the need to carry out some form of maintenance. This could range from the everyday cutting of lawns and hedges right through to repairing a leak. We’d suggest you carry out a visit to the property at the outset and write out a full list of any essential repairs. You can then start to plan and arrange these in order of priority at a timescale to suit you. You may even be able to get a neighbour to provide access for contractors on your behalf. Bear in mind that it cna be hard to find good contractors at short notice.
Travelling & inspections
Never underestimate how much time you may have to devote to an inherited property. If the property is close to home this shouldn’t cause too much trouble. However, if the property is some distance away, you may have to think carefully over how and when to visit. The costs in both time and money could become significant as time goes by. In this case you might want to think about sharing the burden with friends and family to spread the load. You could even ask the same friendly neighbour to assist you with regular inspections.
The three types of inherited property taxes
When it comes to inheriting a house there are three property taxes you’ll need to consider. These are:
- Inheritance Tax
- Capital Gains Tax
- Income Tax
Here we explain the in’s and out’s of each.
What is inheritance tax for property?
In England and Wales you must pay inheritance tax on a person’s estate (property, finances & belongings) if it is worth more than £325,000. If the deceased left the estate to their children or grandchildren, the threshold goes up to £475,000. This applies to adopted, foster or stepchildren, too. This threshold only applies if the person’s estate is less than £2 million. More information about inheritance tax and passing on a home is available here.
If someone is married or in a civil partnership and their estate is worth less than their personal threshold, it is different. Any unused threshold can be added to their partner’s threshold when they die. This means their threshold can be as much as double the standard rate i.e. £950,000.
People that are executors or administrators of the will have to arrange the payment of inheritance tax. They can use funds from the estate to make this payment.
What is the inheritance tax rate for property?
At present, the standard inheritance tax rate is 40%. This is only charged on the part of the estate that is above the inheritance tax threshold i.e. over £325,000.
So, as an example, say the estate you’ve inherited is worth £500,000. With your tax-free threshold of £325,000, inheritance tax will be 40% of £175,000 (£500,000 minus £325,000). This example would mean a personal inheritance tax bill of £70,000.
Inheritance Tax can be reduced to 36% on some assets. This reduction applies if 10% or more of the estate is left to charity in the deceased person’s will.
How to avoid inheritance tax on property
In some circumstances, the estate won’t have to pay any inheritance tax. These can be where the estate:
- all passes to the deceased’s spouse or civil partner, a charity or a community amateur sports club or
- has a value below the inheritance tax threshold of £325,000
You may want to contact a tax accountant or HMRC to work out your family’s own circumstances, remembering these can vary widely. You’ll want to be sure you’ve got this right before deciding whether to sell an inherited house or property.
Capital Gains tax for property
When you sell your main home, you don’t have to pay any capital gains tax. You get full tax relief for this. However, the situation’s very different when you sell a property that isn’t your main home. This means that should you decide to keep an inherited property and rent it out, you’ll have to pay capital gains tax on any eventual profit you make as a result of selling the property at a later date.
Capital Gains Tax calculations
Again, let’s look at an example. Say the property was valued at £200,000 when you inherited it and you then sell it 10 years later for £300,000. You would have to pay capital gains tax of £40,000 (£100,000 profit x 40%).
However, remember that we all have a personal capital gains tax allowance that can used to help offset against the profit. For the current tax year (2020/21) this is £12,300 per person. By taking this off the original profit we would arrive at a capital gains tax liability of £35,080 (£100,000 minus £12,300 = £87,700 profit x 40% = £35,080). Provided the property has previously been written into a deed of trust you may also be able to deduct a partner or spouses capital gains tax allowance. If this were the case this could mean a capital gains tax liability of just £30,160 (£100,000 minus £24,600 = £75,400 profit x 40% = £30,160).
It’s also worth noting that you can deduct all reasonable expenses during the ownership of the property to reduce your tax liability. This could include maintenance costs, accountancy charges, selling costs and legal fees.
In order to have a reasonable idea of just how much capital gains tax you’ll need to pay, you’ll need to work out how much your property is really worth.
How to avoid capital gains tax on inherited property
Currently there are only two ways to avoid paying capital gains tax on an inherited property. These are:
- To nominate the property as your principal residence. By doing so you can then claim Private Residence Relief on any eventual sale
- To sell the property immediately on inheriting it for today’s value so that there’s no increase in value. You could do this by selling either via a traditional estate agent, at auction or via a regulated property buying company. We have more on this subject later.
If you have any concerns over how capital gains tax is calculated HMRC now have this handy online calculator. We recommend you use this to be sure of any inherited property taxes.
Income tax on inherited property
Income tax will only ever be charged on the sale of an inherited property if you have used it for the purpose of generating an income. This would include renting it out. Should you decide to rent out the property you will need to complete a Self Assessment filing under HMRC rules for each year of ownership.
6 Steps to selling an inherited property
1. Check if there is a Will in place
The very first thing to do is check if the person who died left a will behind. A will usually confirms if there are any names attributed to the property. It can also detail specific wishes for how the deceased person’s estate is to be divided up. This can help you instantly make contact with any named parties so that you can start the process of applying for probate.
If a will is not present, you’ll need to talk with a solicitor specifically experienced in wills & probate. Contrary to popular belief, the presence or the absence of a will has no bearing on whether or not probate is required. With regards to bricks and mortar, probate will always be required where an estate is valued at more than £50,000. This is because UK banks and financial institutions have varying limits in place regarding how much they are prepared to release upon a grant of probate.
2. Apply for probate
Probate is the legal name for the process that arranges and draws up a list of all financial assets of the deceased person’s estate. The purpose is to give a person (or people) the legal authority to deal with a deceased person’s estate. These people are known as executors within the official document called the Grant of Probate.
The situation regarding property is much simpler if you are a named beneficiary within a will. This is someone handed a share of the estate by the person who directly inherits it.
Legally, before you can sell an inherited property, you must establish your relationship with the property. To find out more we recommend you talk with a solicitor that specialises in the administration of deceased estates. These are often called wills & probate solicitors or lawyers.
Situations where you may not need Probate
You may not need probate if the person that died:
- Had jointly-owned land, property, shares or money, as these will automatically pass to the surviving owners, or if
- they only had savings or premium bonds
You’ll need to get in touch with each asset holder, such as banks and mortgage company to find out if you need probate to access the deceased’s assets. Different rules apply to each organisation. This is particularly important when it comes to selling an inherited property or house.
Our latest guide explains in detail how to sell a house in probate.
3. Sell your inherited property
In deciding how to sell your property you have three distinct options. Here we list each with their advantages and disadvantages.
Traditional Estate Agents
- Perhaps the best way to go if you’re looking to get the maximum price for your property
- May have the best understanding of an area (if this important to you)
- Typically the slowest route to selling an inherited house or property (3 – 9 months)
- Buyers often re-negotiate the final sale price after survey has been completed
- Could tie you into a long-term marketing contract until property is eventually sold
Auction House Sale
- You are able to set a ‘reserve’ figure to establish minimum acceptable price
- Provided a sale is agreed it could complete in 28 days
- No guarantee of the eventual sale price, depends who is in the auction room on the day
- Often have to wait for the next auction date to come around (2 – 3 months down the line)
- Property may not sell on the day of auction as depends who is attending
- Fees can be high as seller/s are often asked to also pay the buyers fees as well as their own
Regulated property buying company
- You get a discrete sale within 28 days (no need for a ‘For Sale’ or ‘Sold’ board)
- Cash sale with no mortgage funds required
- Once the price is agreed there is no further negotiation
- Your solicitors fees are paid for you
- We can’t think of any!
4. Pay inheritance tax (if necessary)
As detailed above, you’ll need to calculate very carefully the inheritance tax that you need to pay. You can do this by using the online HMRC calculator or talking this through with an accountant.
5. Pay Capital Gains Tax (if necessary)
Remember that it’s important to pay any capital gains tax due in a timely manner. HMRC now insist on reporting capital gains tax returns within just 30 days of the sale of a property. If you miss this deadline they will charge interest and may even invoke a penalty notice. Ensure you have a full list of all costs incurred to date so these can be deducted from your profit.
6. Pay Income tax (if necessary)
Don’t forget, income tax will only be payable if you’ve used the property to produce an income such as renting it out. If this is not the case you can simply ignore this tax.
How to sell an inherited property
Let’s assume you’ve dealt with the probate process and sorted out all of the necessary paperwork using a licensed conveyancer. So now you own the property – or at least a share of it.
And so the final consideration is to establish if the property could be sold quickly in it’s current condition. By this we mean could it be sold in a matter of weeks for a good price.
It’s a well known fact that most house buyers like to buy modernised properties with all of the mod cons in place. If your inherited property is not particularly modern bear in mind that it may struggle to sell. In this case you may want to think about what it would take to refurbish the property. From our experience, a typical full refurbishment takes around 12 weeks to complete and costs £30,000. Do you have the time, money and energy for what could be a lengthy and expensive project? Bear in mind also that you’ll need to find trusted trades to complete all of the works. More than likely you’ll also need to project manage the refurbishment process yourself.
Choosing the right property buying company
You may wish to consider selling your inherited property on quickly and without all the heartache. While you may have an emotional attachment, a clean break could help you move on. It could also be just the tonic to enable you to realise some long-held plans.
An easy solution is for a reputable property buying company to step in and buy your property quickly. If you do decide to go down this road be sure to look for a company that has a proven reputation for buying inherited homes.
Professional homebuyers should provide a genuine and speedy route to sell an inherited house without any headaches. Your chosen homebuyer should be accredited members of national industry bodies such as the PRS – Property Redress Scheme. Be sure to check this out.
Questions to ask house buying companies
Do they adhere to Trading Standards’ Quick House Sale framework? Not all companies will meet these standards.
As you make your choice, look at whether property buying companies can offer you the following benefits:
- Do they have access to a substantial cash fund? This ensures the company can buy your property within just 28 days – or within a timescale that suits you
- Will they keep things simple? You have enough to deal with following the recent passing of a loved one. Will paperwork be kept to a minimum? And is their buying and selling process transparent?
- Will the property company charge fees at any stage of the sales process? Would they cover any of your legal fees?
- Lastly, would the company help you sell your inherited property in any condition? And does it buy property in any location?
So, while there are plenty of companies to help sell an inherited property, we recommend you consider your decision carefully.
We know that selling your inherited property will mean more to you than just bricks and mortar. Aside from its financial value, selling a property after the death of a parent or loved one can spark strong emotions. We believe sellers deserve clear, straightforward communication throughout their dealings with a property company.