Inheriting a property is the primary way in which wealth transfers down through generations. This occurrence can actually have a positive effect on those who find it difficult to buy their own home – for their financial outlook and their family – regardless if they decide to live in it or just sell up and live elsewhere.
But practically, inheriting a house is unfamiliar territory and it often brings on the feeling of “now what?”
One of the first elements that people want to know about when inheriting a property in a Will is the tax consequences – often because they’re just unsure about it.
This is due to a common misunderstanding of the phrase itself, as it can be interpreted as an extra tax that the person who inherited it needs to pay, which is not true. According to UK law, when inheriting a property, this tax is normally paid via the deceased’s estate.
If you decide to sell the house you’ve inherited you may need to pay Capital Gains Tax on the difference of its value between when you received it and when you sell it. Income tax is also of course required on any profits you make from renting it out (depending on your other income levels). There’s also no Stamp Duty on inherited property.
If the property you’ve inherited has a mortgage on it, there are certain things to consider.
One of which is that the lender retains the right to ensure the remaining payments are repaid. Many lenders are understanding with these delicate matters however and are often open to putting payments on hold whilst probate is concluded.
The deceased’s life insurance may cover any outstanding debt, but if it doesn’t and you don’t decide to sell, you may need to take out an additional mortgage in your own name to pay it off. And if you plan on renting it out, you’ll need a buy-to-let mortgage.
Other things of note
- If you already own a home and inherit a property, you’ll need to inform HMRC within two years which one is your primary home.
- Inheriting a property with siblings is common when inheriting a property. You and your siblings will need to decide how it will be owned in a legal sense (in either case, all siblings need to collectively agree). The two options are:
- Joint tenants – this is where you have equal rights to the property and your share is absorbed by the other joint tenants on your death. The last surviving sibling then has the sole right to leave the property to whoever they choose in their will.
- Tenants in common – this is where you each own a share of the property which you can pass on in your will.