Inheriting a property in the UK can be both a financial gain and a tax challenge. While you won’t immediately owe tax upon inheritance, Capital Gains Tax (CGT) may come into play if and when you sell the property.
In this blog, we’ll explain when CGT applies and explore legal ways to reduce or avoid it entirely.
Do You Pay Capital Gains Tax on an Inherited Property?
No — not when you inherit it.
CGT is only triggered when you sell, gift, or otherwise dispose of the inherited property.
What’s Taxed?
HMRC considers the gain to be the difference between:
• The sale price (when you sell it)
• The market value at the time of death, often referred to as the “base cost.”
7 Ways to Reduce or Avoid Capital Gains Tax
1. Live in the Property (Private Residence Relief)
If you make the inherited home your main residence, you may qualify for Private Residence Relief (PRR) — which could fully or partially exempt you from CGT.
You’ll need to live there for a reasonable period and not use it primarily as a rental or investment.
2. Use Your CGT Annual Exemption
For the 2024/25 tax year, every individual has a Capital Gains Tax annual exemption of £3,000. If the property is jointly owned (e.g. between siblings), each person can use their own exemption.
Example: If two people inherit a home and sell it, they can jointly deduct £6,000 from the gain.
3. Sell During a Low-Income Year
Your CGT rate depends on your income:
• 18% for gains falling within the basic rate band
• 24% for gains above that (from April 2024)
If your total income is low in a particular tax year, more of the gain could be taxed at 18% instead of 24%, reducing your bill.
4. Transfer Ownership to Your Spouse or Civil Partner
You can transfer ownership to a spouse or civil partner without triggering CGT. This strategy allows:
• Use of two sets of annual exemptions
• Potential to keep the gain within the lower CGT band
Note: The base cost stays the same — it doesn’t “reset” — but it spreads the gain.
5. Deduct Allowable Costs
You can reduce the taxable gain by deducting:
• Legal, valuation, and estate agent fees
• Stamp Duty (if paid)
• Expenses related to capital improvements, such as an extension or loft conversion.
Routine repairs or maintenance (e.g. repainting, fixing leaks) aren’t deductible.
6. Consider Timing and Partial Sales
If the property has land or is divisible, you might sell in parts across multiple tax years — using your annual exemptions more than once.
7. Advanced: Use of Trusts (Pre-Inheritance Planning)
Setting up a family trust before death can, in some cases, help spread CGT or IHT burdens among beneficiaries.
Trusts come with complex tax rules — including their own CGT and IHT charges — so always consult a professional before considering this route.
What About Inheritance Tax (IHT)?
CGT and IHT are entirely separate.
• Inheritance Tax is based on the value of the estate at death.
• Capital Gains Tax only applies if you later sell the inherited property.
IHT is usually paid by the estate before assets are passed on. But if the estate value exceeds the nil-rate band (£325,000, or £500,000 if a home passes to direct descendants), some IHT may apply.
Final Thoughts
While CGT doesn’t apply when you inherit a property, it can become a significant cost when you sell. With proper planning, you can often reduce or even eliminate that tax bill.
Are you looking to sell an inherited property or improve your tax situation? Contact Pro Taxman for expert advice tailored to your situation.