Inheriting a property may be an overwhelming time for you, but there are essential things you need to sort out. Though you will not have to make any immediate decision. As the legal process will take up to a year till the property is transferred under your name. This legal process is known as probate.
However, at that time you need to be thinking about whether you want to keep the property and move in, further rent it out to tenants, or sell it off. This article will take you through the various aspects you should be aware of when inheriting a property.
How is ownership of an inherited property transferred?
Transferring ownership of an inherited property requires you to fill out these government property transfer forms and file them with the Land Registry.
With shared ownership
If you inherit a property, the ownership of which will be shared with other people, the decision on what to do with the property will have to be a decision you all agree on.
With a mortgage
If the property you inherit has a mortgage, the situation will get a little bit more complicated. Though, usually, the deceased's estate is first used to pay off any taxes, for clearing of debts including mortgages. However, if you inherit such a property first find out if the deceased had any life insurance that can be used to clear the mortgage.
If the life insurance does not cover the mortgage, you should confer the terms and conditions of the mortgage for terms regarding when the mortgage holder has passed away. It may be that the payments on the mortgage will freeze until the estate of the deceased has settled all its dues, and the leftover property has been distributed. However, interest payments may continue to build up.
You should speak to the mortgage lender and discuss how to proceed with your case. In some cases, the estate of the deceased pays off the mortgage. However, if there is still an outstanding mortgage, you could get the mortgage under your name. That will, of course, have its' own complications.
Taxes on an Inherited Property
The property you have inherited could have various taxes due on it. Some of the common taxes which may be due are as follows:
If the deceased's estate's total value is greater than £325,000, then inheritance tax will become due on the property. This is called the "Nil Rate Band". The amount greater than £325,000 will be subject to 40% inheritance tax.
Inheritance tax becomes due within 12 months of the deceased's death and should be settled by the estate's executor. However, if you are the deceased's direct descendant and the property you inherit is their primary residence, then the amount of inheritance tax will be reduced.
The way that works is that you are granted an allowance of inheriting £150,000 worth of property from your direct ascendants tax-free. This is called the "Main Residence Nil Rate Band". This amount is then added to the Nil Rate Band. In simple terms, you can inherit your parent's or grandparent's home without having to pay inheritance tax if the property is worth up to £475,000.
The main residence nil-rate bands will increase from 2021 to 2022 in accordance with the Consumer Price Index. Please click here for further information relating to inheritance tax.
Capital Gains Tax
You may be inheriting a property, but you do not want to keep it and decide to sell it for one reason or another. In this case, you should be aware of what capital gains tax is and how it will affect your sale.
You will have to pay a tax on any profit you make when you sell the inherited property. However, if you are a basic rate income taxpayer, you are granted a tax allowance that allows you to make profits up to £12,000 in one year without paying capital gains tax.
So you will deduct the amount of tax allowance from the total profit you will be making to find out the total amount you will be receiving from the sale of the property. Please click here to deduce how much capital gains tax will need to be paid in your case.
If you inherit property from which you will be receiving rent or letting it out yourself; then the income you start earning will be subject to income tax.
If you inherit a buy to let property and want to sell the property, you will first have to move to eviction the existing tenant. Then you can proceed with the sale of the property. If you want to keep the buy to let property, you will need to enter into a new contract with the tenants which names you as the landlord.
Further, note that if there is a mortgage on the buy to let property you inherit, you have to get the mortgage transferred to your name or remortgage with the mortgage broker.
No stamp duty on inherited property
If you are inheriting a property, you do not have to pay any stamp duty. It may only become payable if the ownership of the property you inherit is shared with another and either of you wants to buy the other out.
However, please note that you will not be considered the first-time-buyer if you want to keep this property. This will affect you if you, later on, decide to purchase another property. You will be liable to pay the additional stamp duty rate on the new property you purchase. Further, you will not be able to benefit from the government bonus on Lifetime ISAs.
When inheriting a property, there is a critical decision for you to make. You can keep it, move in, sell it, or be renting it out.
However, you should be aware of what will follow from the decision you make. You will have ample time to decide this matter as the legal process of the property being transferred under your name takes around a year.