Inheriting a property can lead to a lot of questions. How do you put an inherited house in your name? What taxes will you owe when you inherit a house? What do you do about the mortgage on an inherited property? And should you keep, rent or sell the house? Here we look at everything you need to know.
Inheriting a property is likely to be an emotional time. You may now be facing decisions about your beloved family home, or a property a long way away from where you live.
According to research by bridging lender Market Financial Solutions in September 2017, 36 per cent of us are set to inherit a property, which it estimated was equivalent to 18.6m people in the UK.
If you have just inherited a property, in most cases you won’t have to make any immediate decisions regarding your inheritance.
This is because you can’t do anything with a property until probate is complete. Probate is the process where the executors of the will settle debts and sort out the deceased’s affairs before handing assets over to the beneficiaries. It can take up to a year for probate to be completed.
How probate affects an inherited property
If the deceased had a will then it will have named executors. This could be a solicitor, relative or friend. They are responsible for paying any taxes, clearing debts and distributing the estate. This can be a lengthy process taking several months.
During this time you can do very little with the property you have inherited as it isn’t technically yours until probate is complete. If the property has a mortgage it is a good idea to get in touch with the lender and explain the situation.
Lenders are generally sympathetic and most mortgages have a grace period when repayments are suspended while the estate is sorted out.
If the person died without a will, or a spouse, then you will need to apply for a ‘grant of representation’ to access their bank account. This is also known as probate. You will then be able to access their funds to pay for their funeral and to arrange for their assets to be sold or passed on to beneficiaries. You will also be responsible for settling any debts and paying tax.
Inheriting a house with a mortgage
When you inherit a property with a mortgage you face the added complication of sorting out the mortgage. In some cases the deceased may have had life insurance that can be used to clear the mortgage.
If the mortgage wasn’t covered by a life insurance policy you need to find out what the lender expects from you. Check the terms of the mortgage for any details about what happens in the event of the death of the mortgage holder. Usually payments are frozen until probate is sorted out. But interest may well continue to build during that period.
If the deceased had other assets and cash then the mortgage is usually viewed as a debt that needs to be settled out of the estate before the property is passed on.
Once the executors of the will have settled debts and taxes then the property will become yours. If it still has a mortgage outstanding on it, you will need to speak to the lender about getting a mortgage in your name. This could raise problems as you may already have a mortgage on your home and will have to pass affordability tests for a new mortgage. We’d recommend speaking to a fee free mortgage broker to work out the best option for your circumstances.
Alternatively you could sell the property in order to pay off the mortgage.
Tax due on an inherited property
Various taxes could be due on the property you’ve been left in a will.
Inheritance tax. If the combined value of the deceased’s estate (including the property, savings, shares and other assets) is more than £325,000 then inheritance tax will be due.
Capital gains tax. If you sell the property you could have to pay capital gains tax.
Income tax. If you have inherited a buy-to-let or holiday let then you will have to pay income tax when you start receiving income from rent.
Inheritance tax on inherited property
Depending on the value of the property you have inherited, and the rest of the deceased’s estate, inheritance tax could need to be paid. The basic rule with inheritance tax is that if the total estate (including property) is worth more than £325,000 then 40% of everything over that amount needs to be handed over to the taxman.
However, there is an exemption for main residences that are passed on to a direct descendant. That means if you have inherited your parents’ or grandparents’ home the inheritance tax bill will be reduced.
In the tax year 2019-20, the main residence nil-rate band is £150,000. This allowance is added onto the main inheritance tax nil-rate band of £325,000. So, depending on the value of the rest of the estate you could be able to inherit a property worth up to £475,000 without having to pay inheritance tax.
Inheritance tax allowances can be passed between spouses. So, if one of your parent’s or grandparent’s has already died, and didn’t use their inheritance tax allowances at the time, you may be able to inherit an even more valuable property tax-free. For example, if both parents have died and the first to die passed all their assets to the surviving spouse when that spouse dies they could pass a property worth up to £950,000 on to their children or grandchildren tax-free.
The residence nil-rate band will increase in the 2020/21 tax year to £175,000. After that is expected to increase annually in line with inflation.
Inheritance tax is due within 12 months of death. It should be settled by the executors of the estate. It is possible to pay inheritance tax on property in annual instalments. this should avoid a situation where the property has to be sold in order to settle an inheritance tax bill.
Capital gains tax on inherited property
You will only pay capital gains tax on an inherited property if you decide to sell it. If the property has increased in value since you inherited it then capital gains tax is due on the profit.
Capital gains tax is levied at 18% on gains from residential property if you are a basic-rate income taxpayer. If you are a higher or additional rate taxpayer the rate rises to 28%. Everyone gets an annual capital gains tax allowance of £12,000. This is how much profit you can make from selling taxable assets (including property that isn’t your main residence) before capital gains is due. So, if the profit on the inherited property is less than £12,000 you won’t have to pay capital gains tax unless you have used up your annual allowance.
If you move into the property and it becomes your main residence capital gains tax won’t be due when you sell it.
Income tax on inherited property
You will only owe income tax on an inherited property if you start earning an income from it. That means you let it out and receive rent from it. If you do then the income you receive will need to be declared on a self-assessed tax return. Income tax will be due at your marginal rate, which depends on your total income for the year.
Stamp duty on inherited property
Stamp duty is not levied on inherited properties. However, if the property you inherit is shared with other beneficiaries and one of you buys out the others then stamp duty could be due.
If you are considering buying out other beneficiaries we would recommend you speak to an independent financial advisor. They can help you understand whether you will have to pay stamp duty.
Transferring ownership of an inherited property
During probate the executors of the will need to transfer ownership of the property into the beneficiary’s name. In order to do this they need to fill out forms with the Land Registry.
What to do with an inherited property: keep, sell or rent?
Once probate is complete, and the inherited property has been transferred into your name it is time to decide what to do with it. You have three options: sell it, move into it or rent it out.
Selling an inherited property
Selling up when you inherit a property can be a difficult job. There is a lot to do and it can all be made more tricky as the property could be a long way from where you live. There could also be a lot of emotions involved if it is a family home.
The first thing you’ll need to do is clear the property of its contents. You may want to keep some items, sell others and donate things to local charity shops.
You can also use a professional service to perform a full house clearance or simply remove bulky items you don’t want. If you can’t face sorting through everything straight away or there is too much to do at once you could move everything into storage.
Many people do up inherited properties before they sell them. This is usually because the property had elderly owners and can get a better price with some updating. You may want to strip out dated wallpapers and carpets and redecorate the property so it is more appealing for potential buyers.
Once your property is on the market selling it is the same as selling any other home. Don’t forget you may have to pay inheritance tax or capital gains tax on the proceeds.
Renting out an inherited property
You could choose to let out the property you have inherited. This means you can gain another income stream. You will become an ‘accidental landlord’, meaning someone who has ended up with an investment property without intending to become a buy-to-let landlord.
Moving into an inherited property
Your third option when you inherit a property is to move into it. If there is a mortgage on the home you’ll need to put it into your name. In some cases, you may be able to stay with the same lender or you may choose to get a new deal. Either way you have to pass the affordability and credit checks to get a mortgage. If you own it outright then you can move in and start enjoying your new home.
Inheriting a buy-to-let property
If you inherit a property with tenants then you need to decide what to do with them. Do you plan to sell the property or live in it yourself? If so you’ll need to check the terms of the rental contract to find out how you can go about evicting the tenants so you can sell.
If you want to continue renting out the property then you need to get a new contract drawn up naming you as the new landlord.
Where there is a buy-to-let mortgage you will need to either get the mortgage moved into your name or remortgage to a new deal. Whichever option you go for you’ll have to pass the lenders affordability tests. We would recommend you speak to a mortgage broker to find out the best deal for your situation.
Insurance when you inherit a house
There is a lot to think about when you inherit a property but don’t forget about insurance. Whatever you ultimately plan to do with the property during the probate process it is likely to be unoccupied. You will need to get unoccupied property insurance during this period. Empty home insurance covers you in case of damage or criminal acts.
Once probate is complete the insurance you need for the property will depend on what you decide to do with it. If you are moving in you’ll need standard home insurance, or second home insurance if you are keeping another property too. Anyone planning to let out an inherited home will need landlord insurance.
How an inherited property could affect future house purchases
When you inherit a property you become a homeowner. This could have serious implications if it is the first property you have ever owned.
It means you no longer qualify as a first-time buyer. As a result, you won’t benefit from a government bonus on any Help-to-Buy ISAs. You also won’t get first-time buyer relief on stamp duty if you buy another property. Also, if you keep the property you’ve inherited you will have to pay the additional stamp duty rate if you buy another property.
Inheriting a property with siblings
If you inherit a house with other people the situation becomes more complicated. You’ll need to make all your decisions jointly with your siblings or whoever you have inherited the property with.
The main decision is what you all want to do with the property. Selling it is the simplest option. Once it is sold you then split the proceeds.
If you choose to rent out the property then you’ll need to decide who is going to manage it. Will one of you do it or will you get a lettings company to manage it for you all? You also need to work out how you are going to split the costs and income from the property.
Alternatively, one of you may want to live in the property. In this scenario you will need to decide if the person who wants to live in the house will buy out the other owners or will they rent their share of the home to them?
Whatever you decide it will need to be a decision you all agree on.
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