Do I Pay Stamp Duty on Inherited Property?
Inheriting a property comes with many questions. Do I need to pay stamp duty on an inherited property? Is inherited property subject to capital gains tax? Do I need to pay inheritance tax on inherited property? And how can I sell inherited property?
There are other complications that inherited property can bring. For example, you may need to consider whether inheriting a property affects your status as a first time buyer. There are also tax implications of jointly owning an inherited property.
Inheriting a property always comes at an emotional time. The loss of a loved one is never easy. The added complexity of the tax implications that inheriting a property brings can often compound the situation. We’ve written this guide to help you navigate the most common questions around stamp duty and tax on inherited property.
Interested in something specific such as whether or not you pay stamp duty on jointly owned inherited property? Use our menu below to navigate through the article easily. Otherwise, read on for the complete guide.
- What is Stamp Duty?
- Do I need to pay Stamp Duty on inherited property?
- Am I still a first time buyer if I inherit a property?
- Do I pay Stamp Duty on jointly owned inherited property?
- Do I pay Capital Gains Tax when I sell an inherited property?
- Do I pay Inheritance Tax on inherited property?
- What is the best way to sell inherited property?
What is Stamp Duty?
Stamp Duty Land Tax (commonly known as SDLT) is a one off tax payable if you buy a property or land over a certain price in England and Northern Ireland. The rate of stamp duty is variable, and the amount that is due depends on the price of the property that you are purchasing. The rate of stamp duty that you pay also depends on the type of property you are buying. You pay different rates of stamp duty if you are a first time buyer, own one or multiple properties, or if the property is residential or commercial.
Stamp duty rates have changed somewhat over the past couple of years. The coronavirus pandemic prompted the government to introduce a Stamp Duty Holiday to buoy the housing market. Rates have since returned to normal. You can find the rates of stamp duty below.
|Property or lease premium||SDLT Rate|
|Up to £125,000||0%|
|The next £125,000||2%|
|The next £675,000||5%|
|The next £575,000||10%|
|Everything over £1.5 million||12%|
These are the rates that will apply to the vast majority of homeowners in the UK. However, if you are buying an additional residential property that will mean you own more than one property in the UK you will typically pay an additional 3% SDLT. You also begin paying SDLT once the property value reaches £40,000. You can see the rates of Stamp Duty on additional properties below.
|Property or lease premium||SDLT Rate|
|Up to £125,000||3%|
|The next £125,000||5%|
|The next £675,000||8%|
|The next £575,000||12%|
|Everything over £1.5 million||15%|
These Stamp Duty rates apply to you if you live in England and Northern Ireland. If you live in Scotland or Wales you’ll be subject to different rates. In Scotland this is known as Land and Building Transactions Tax (LBTT), whilst in Wales it is simply Land Transaction Tax (LTT).
Do I need to pay Stamp Duty on inherited property?
You do not need to pay Stamp Duty Land Tax at the moment that you inherit a home. There are a number of Stamp Duty and other tax implications that inheriting a property could have however when it comes to house purchases in the future. Inheriting a property can also impact tax allowances that you may be entitled to. In the rest of this article we will run through some of these scenarios and talk about the Stamp Duty and tax implications of inheriting a property.
Am I still a first time buyer if I inherit a property?
This is an important question because of first time buyer relief. So what is first time buyer relief? In an attempt to help first time buyers get a foot on the property ladder the government introduced a discount on Stamp Duty for first time buyers. You can read a general description of the measure on the government website but in short first time buyers will pay no stamp duty on properties that are worth less than £300,000. If the property value is between £300,000 and £500,000 then first time buyers will pay Stamp Duty at a rate of 5%, which represents a reduction of £5,000 vs the amount of Stamp Duty they would pay without the relief. However, if the property price is over £500,000 then there is no first time buyer relief and Stamp Duty must be paid at the normal rates.
So, to answer the initial question: am I still a ‘first time buyer’ if I inherit a property? And therefore do I qualify for the relief? The short answer is no. When you inherit a property (and you have a ‘major interest’ of over 50% in it) you miss out on the benefit of first time buyer relief. This is because any subsequent property that you purchase will be classed as an ‘additional property’ for the purposes of Stamp Duty. In fact, as long as your ownership of the property exceeds 50% then you will have to pay the higher rate of tax on any additional property that you buy.
If your ownership of the property is less than or equal to 50%, and you purchase an additional property in the three year period from the date of inheritance, then you aren’t subject to the higher rates of Stamp Duty. However, you still won’t be entitled to first time buyer relief.
Do I pay Stamp Duty on jointly owned inherited property?
You aren’t liable to pay Stamp Duty on an inherited property if it’s jointly owned. However, the answer to this question can change depending on whether you want to buy the other shares in the property to gain complete ownership. If you are intending on buying out the other party’s shares in the property then you will be liable to pay stamp duty on the amount that you are paying.
For example, if you have inherited 50% of a property worth £360,000 and you want to buy the other 50%, you will be liable to pay Stamp Duty on £180,0000. This changes if you already own a property, in this case you will have to pay the higher rate of Stamp Duty. However, if you are going to move into the inherited house and sell your current home, then you can claim a refund of the higher rate of Stamp Duty. You should do this within three months of the sale of your home.
Do I pay capital gains tax when I sell an inherited property?
If the property that you have inherited isn’t your main residence, and it has risen in value when you come to sell it, then you will be liable to pay Capital Gains Tax (CGT). You will only have to pay CGT on the increase in value from the date that you inherited the property to the date that you sell it.
It’s important that you keep HMRC up to date on which property is your main residence, as this can obviously have serious implications for whether or not you pay Capital Gains Tax on your inherited property.
Do I pay inheritance tax on inherited property?
Whether or not you need to pay inheritance tax on a property will depend on both the value of the property that you’ve inherited and the value of the rest of the deceased’s estate. The general rule with inheritance tax is that if the value of the deceased’s estate (including the property) exceeds £325,000 then you will have to pay 40% inheritance tax on everything over that amount.
There are some exemptions and exceptions to this rule however. The first is that if the property is a main residence and is being passed on to a direct descendent, the tax rate is reduced. This is known as the ‘main residence nil rate band’ and the value of this band in the 2020/21 tax year is £175,000. It has been frozen at this level until April 2026. This amount will be added onto the £325,000 allowance that already exists. So theoretically if there were no other assets in the estate you could inherit a property up to £500,000 without having to pay inheritance tax.
Another way that you can decrease the amount of inheritance tax you pay on a property is by passing inheritance tax allowances between spouses. For example, if one of your parent’s has already died and didn’t use their inheritance tax allowance, they’re able to pass their inheritance tax allowance to their spouse. This means that when the surviving spouse dies they would be able to effectively pass two sets of inheritance tax allowance on to the beneficiary. If this is to a direct descendant and it’s a main residence, then it means that a property of £1,000,000 can be passed without any inheritance tax.
What is the best way to sell inherited property?
Before you can legally sell an inherited property you need to apply for probate. Probate is broadly defined as the legal right to deal with someone’s possessions and property, money (also known as their ‘estate’) after they die. You are unable to either distribute money or put a property on the market until probate is granted. Applying for probate can be quite a long-winded process and can also be legally complex. To simplify the process it’s wise to enlist the help of a solicitor. It can make a stressful and fraught situation a bit easier.
Once you’ve been granted probate you will legally be allowed to sell the property. If you don’t intend to use the inherited property as your main residence then it can become quite costly. There are costs like council tax, energy bills, and mortgage repayments that might all need to be paid. For this reason many people want a stress free way to sell their house fast.
If you find yourself in this situation, consider using a cash house buyer like SmoothSale. We can buy your property from you for cash in a timescale that you prefer. We’re not picky about location or condition, we buy any house. The service is fee-free, and we’ll even cover the cost of your solicitor. Why not give us a whirl? Get a cash offer today or give us a call on 0800 368 8952.