What to do when inheriting a property?

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Inheriting a property may be an overwhelming time for you but there are important 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 you are inheriting a property.

How ownership of an inherited property is transferred?

Transfer of ownership of an inherited property requires you to fill out some government property transfer forms and file them with the Land Registry. Please visit the page to find the forms you are required to file.

Inheriting a property with shared ownership

If you are inheriting 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.

Inheriting a property with a mortgage

If the property you are inheriting has a mortgage, the situation will get a little bit more complicated. Though, usually, the estate of the deceased is first used to pay off any taxes, for clearing of debts including mortgages. However, if you are inheriting such a property first find out if the deceased had any life insurance which 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 have 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.

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 are inheriting is shared with another and either of you wants to buy the other out.

However, please take note that in case you want to keep this property you will not be considered as first time-buyer. 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 take benefit of the government bonus on Help to Buy ISAs.

Please see our articles on Stamp Duty and Help to Buy ISAs.

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:

Inheritance tax

If the total value of the deceased’s estate is greater than £325,000, then inheritance 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 death of the deceased and should be settled by the executor of the estate.  However, if you are the direct descendant of the deceased and the property you are inheriting is their main 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 visit https://www.gov.uk/government/publications/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band for further information relating to inheritance tax.

Capital Gains Tax

You may be inheriting a property, but for one reason or another, you do not want to keep it and decide to sell it. 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 which allows you to make profits up to £12,000 in one year without having to pay 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 visit https://www.gov.uk/capital-gains-tax to deduce how much capital gains tax will need to be paid in your case.

Income Tax

If you are inheriting a property from which you going to be receiving rent or you will be letting it out yourself; then the income you start earning will be subject to income tax.

If you are inheriting a buy to let property want to sell the property you will first have to move for eviction of the existing tenant. Then you can proceed with the sale of the property. If you want to keep the buy to let property then you will need to enter into a new contract with the tenants which names you as the landlord.

Further, also note that if there is a mortgage on the buy to let property you are inheriting, you have to get the mortgage transferred to your name or remortgage with the mortgage broker.

If you want further information relating to this, please see our article on Buy to Let.

Summary

When inheriting a property, there is a very important 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. Though, 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.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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