Do I Have to Pay Capital Gains Tax on Inherited Property?

Inheriting property does not trigger Capital Gains Tax immediately, but you may owe tax later if you sell it at a profit. Learn how it works and what reliefs may apply.

Introduction

Inheriting a property can be both a financial opportunity and a source of confusion when it comes to taxes. Many people wonder whether they need to pay Capital Gains Tax (CGT) immediately when they inherit, or only later if they decide to sell.

The good news is that you do not pay CGT when you inherit a property. However, you may have to pay it later if the property is sold and its value has increased since the date of inheritance. This article explains how CGT works on inherited property, how to calculate any tax due, and what exemptions or reliefs might apply.

When Capital Gains Tax Applies

Capital Gains Tax is paid on the profit (the gain) you make when selling or disposing of an asset that has increased in value. It applies to property, shares, and certain valuable possessions.

When someone dies and leaves you a property:

  • No CGT is due at the point of inheritance.

  • Inheritance Tax (IHT) may apply to the estate of the deceased, depending on its total value.

CGT becomes relevant only if and when you sell the inherited property later on. The tax is calculated based on the increase in value between the date you inherited it and the date you sell it.

The “Base Value” of an Inherited Property

The key factor in working out CGT is the market value of the property at the date of death. This value becomes your base cost for CGT purposes.

If you later sell the property for more than this base value, the difference is considered a capital gain.

For example:

  • The property was valued at £250,000 at the date of death.

  • You sell it a few years later for £310,000.

  • Your gain is £60,000 before any allowances or reliefs are applied.

You only pay CGT on that gain, not the entire sale price.

When You Do Not Pay CGT

You do not pay Capital Gains Tax if:

  • You inherit a property but do not sell it. Simply inheriting does not trigger CGT.

  • You live in the inherited property and it becomes your main home. In that case, the gain may be covered by Private Residence Relief when you sell.

  • The total gain is below your annual CGT allowance (currently £3,000 for the 2024 25 tax year).

When You Do Have to Pay CGT

You may need to pay Capital Gains Tax if:

  • You sell the inherited property and its value has risen since you inherited it.

  • You gift the property to someone other than your spouse or civil partner.

  • You transfer ownership in a way that counts as a disposal for tax purposes.

Calculating Capital Gains Tax on Inherited Property

To work out how much CGT you owe, follow these steps:

  1. Find the market value at the date of death this is your acquisition cost.

  2. Work out the sale price (minus selling costs such as estate agent or solicitor fees).

  3. Deduct any allowable costs such as improvements (extensions or renovations, not repairs).

  4. Calculate the gain the difference between the sale proceeds and your adjusted base cost.

  5. Apply your CGT allowance currently £3,000 per person per year.

  6. Apply the correct tax rate:

    • 18% if you are a basic-rate taxpayer and the gain falls within your basic-rate band.

    • 24% if you are a higher- or additional-rate taxpayer, or if the gain pushes you into a higher band.

Example Scenario

Imagine you inherit a house worth £200,000 at the date of death. Five years later, you sell it for £280,000.

  • Sale price: £280,000

  • Base value (at date of death): £200,000

  • Selling costs: £5,000

  • Gain: £75,000 (£280,000 £200,000 £5,000)

You can then deduct your annual exemption of £3,000, leaving a taxable gain of £72,000.

If you are a higher-rate taxpayer, you would pay 24% on that £72,000, giving a tax bill of £17,280.

Reducing or Avoiding Capital Gains Tax

You can reduce the amount of CGT due through careful planning:

  • Use your annual allowance: Each individual gets a £3,000 CGT exemption each tax year. If the property is jointly owned, both owners can use their allowances.

  • Transfer to a spouse or civil partner: Transfers between spouses or civil partners are CGT-free, allowing both to use their allowances and lower tax rates.

  • Private Residence Relief: If you live in the inherited property and it becomes your main home, the gain may be fully exempt from CGT when you sell.

  • Keep accurate records: Maintain documents showing the property’s market value at the date of inheritance, selling costs, and any improvements made.

Reporting and Paying CGT

If you sell an inherited property that is not your main home, you must:

  • Report the sale and pay any CGT within 60 days of completion using HMRC’s online property return system.

  • Alternatively, if you sell in the course of a tax year and have other disposals, you can include the gain in your Self Assessment.

Late reporting or payment can result in penalties and interest charges, so it is best to act promptly.

Inheritance Tax vs Capital Gains Tax

It is important to distinguish between Inheritance Tax (IHT) and Capital Gains Tax (CGT):

  • Inheritance Tax is paid on the value of the deceased person’s estate before distribution to beneficiaries.

  • Capital Gains Tax applies only later, if you sell the inherited asset at a profit.

In most cases, IHT is settled by the estate, not the beneficiary, before assets are distributed.

The Role of an Accountant

An accountant can help you:

  • Calculate the correct CGT due on an inherited property.

  • Claim available allowances and reliefs.

  • Ensure timely reporting and payment to HMRC.

  • Advise on strategies to minimise future tax liabilities.

Professional advice is particularly useful if you have inherited multiple assets or share ownership with other beneficiaries.

Conclusion

You do not pay Capital Gains Tax when you inherit a property, but you may owe tax later if you sell it for more than its value at the date of inheritance. The gain is calculated based on that valuation, and several reliefs can reduce or eliminate the amount owed.

Keeping detailed records and understanding your reporting obligations helps you stay compliant and avoid unnecessary tax. If you are uncertain about valuations, timing, or reliefs, an accountant can guide you through the process and ensure you only pay what is necessary.