Inheriting a property can feel like a windfall, but it also comes with tax obligations many people are not prepared for. Whether you decide to keep it, rent it out, or sell it, understanding the Capital Gains Tax position from the outset can save you a significant amount of money and prevent costly mistakes later.
This guide explains how CGT works for inherited property, how your gain is calculated, and what reliefs might be available to you.
Quick Answer
When you inherit a property, your base cost for CGT purposes is the market value at the date of death, not the original purchase price. This is called the probate value. Any gain you make on a future sale is calculated from that value, not from what the deceased originally paid. This often means a significant step-up in value that reduces your taxable gain.
How Is the Gain Calculated on an Inherited Property?
For most assets, your CGT gain is the difference between what you paid (your base cost) and what you received when you sold. Inherited property is different.
Your base cost is the market value of the property at the date of death, as agreed with HMRC for Inheritance Tax purposes (the probate value). This value is set regardless of what the original owner paid decades earlier.
Example: A property originally purchased in 1990 for £60,000 was worth £350,000 at the date of death. You inherit it and sell it two years later for £380,000.
Your gain is not £320,000 (sale minus original purchase). Your gain is £30,000 (sale price minus probate value).
This step-up in base cost is one of the most valuable aspects of inheriting property rather than receiving it as a gift during someone’s lifetime.
When Does CGT Apply?
CGT applies when you dispose of the inherited property if it is not your main home. Disposal includes:
- Selling the property
- Gifting it to another person (at market value for CGT purposes)
- Transferring it to a trust
If you move into the inherited property and live in it as your main home, Principal Private Residence relief will eventually exempt it from CGT for the periods of occupation, plus the final 9 months of ownership.
What Is the 60-Day Reporting Rule?
If you sell a UK residential property and CGT is due, you must report the gain and pay any tax owed within 60 days of the completion date. This is a strict deadline that applies to inherited property sales just as it does to any other residential disposal.
Missing the 60-day deadline results in automatic penalties. The obligation to report and pay is yours, not something HMRC chases you about automatically.
What Costs Can You Deduct?
When calculating your gain, you can deduct:
- The probate value (your base cost)
- Solicitor and estate agent fees paid on the sale
- Costs of any capital improvements made since you inherited the property
- Costs of establishing or defending your title to the property
You cannot deduct routine maintenance costs or letting agent fees (these are deductible against rental income if the property was let, but not against CGT).
Reliefs That May Apply
Annual Exempt Amount: The first £3,000 of gains in the 2024/25 tax year is free from CGT. If multiple beneficiaries inherited the property jointly, each person has their own £3,000 exempt amount.
Principal Private Residence Relief: If you moved into the inherited property and lived in it as your main home, PPR relief applies for those periods. The final 9 months of ownership always qualify, regardless of occupancy.
Spousal Transfer: If the inherited property passes to a surviving spouse or civil partner, no CGT arises on the transfer itself. The surviving spouse takes on the probate value as their base cost.
What About Inheritance Tax?
Inheritance Tax and Capital Gains Tax are separate taxes. You may have already paid IHT on the estate before the property transferred to you. The fact that IHT was paid does not reduce your CGT liability when you later sell.
However, any IHT attributable to the increase in value of the property between the date of death and the date of sale can sometimes be deducted from the CGT gain. This applies in limited circumstances and requires careful calculation.
Joint Inheritances
If you and other beneficiaries inherit a property jointly, each person owns a share and is liable for CGT on their own share of any gain. Each person also has their own annual exempt amount. Where beneficiaries have different income levels, it can sometimes be tax-efficient to adjust ownership proportions before selling, though this requires specialist advice to ensure it is done correctly.
FAQs
I inherited a property two years ago but have only just decided to sell it. Is it too late to get advice? Not at all. CGT planning before completion is always preferable, but a tax specialist can still ensure the return is filed correctly, all deductions are captured, and any available reliefs are applied. You have 60 days from completion to report and pay.
The property has fallen in value since I inherited it. Do I have a CGT loss? Yes. If you sell for less than the probate value, you have made a CGT loss. This loss can be set against other capital gains you make in the same or future tax years, reducing your overall CGT liability. It must be reported to HMRC to be claimed.
I inherited the property with my sibling. How do we report the gain? Each of you reports your own share of the gain separately, using your own HMRC account. You each have your own annual exempt amount and calculate tax based on your own income for the year.
Does the probate value need to be officially agreed with HMRC? Yes, in most cases the probate value is agreed with HMRC during the estate administration. If it was not formally agreed (for example because no IHT return was required), you will need to establish a defensible market value at the date of death, usually by obtaining a retrospective valuation from a qualified surveyor.
The property has been let since I inherited it. Does this affect my CGT position? Renting out an inherited property does not itself trigger CGT. However, any rental profit is subject to Income Tax while you own it. When you sell, the full period of ownership is considered for CGT, including the letting period. Lettings relief is now very restricted and only applies in limited circumstances.
Get the Right Advice on Inherited Property
Our principal tax adviser is an ACCA and ATT qualified tax specialist and HMRC Registered Agent with over 25 years of personal tax experience, including inherited property CGT calculations and 60-day reporting. Kent Tax Specialists advises clients across Gravesend, Dartford, Maidstone, Medway, Sevenoaks and the wider Kent area. Contact us today before you complete your sale.
Also see: Capital Gains Tax in Gravesend | Capital Gains Tax in Sevenoaks | Capital Gains Tax in Tonbridge
