No one enjoys paying large amounts of tax. Whether you are paying inheritance tax when a loved one passes away, income tax on your salary, or capital gains tax on a growing asset, you may want to find ways to reduce the amount of tax due.
Capital Gains Tax is most commonly paid on expensive assets, which means that quite a lot is likely to be due. When you inherit a property, this can create questions surrounding this subject, such as: will you have to pay Capital Gains Tax – and if so, how much?
You should generally seek expert financial advice on this subject if unsure of what is due and when. But for an overview of Capital Gains Tax and how it relates to inherited property, keep reading our blog below.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is paid to the government when you sell an asset that has significantly increased in value since you first bought it. Most commonly, this applies to houses, but it can also apply to antiques, cars, or any other major asset.
You are not expected to pay Capital Gains Tax on your primary residence. It is only due on extra properties you own once the time arrives to sell.
When selling your house, you will need to pay this tax once the deal is completed. However, it is also due when you give it away as a gift, swap it for something, or get compensation (e.g. an insurance payout).
You pay CGT on the gain that has been made rather than the total value. So, if you bought a house for £250,000 and sold it for £350,000, you would only pay Capital Gains Tax on (up to) the £100,000 difference.
There are a couple of methods to reduce the amount of CGT you pay, which we have outlined further below in this blog.
Will I have to pay Capital Gains on inherited property?
You will only have to pay capital gains tax on inherited property if it has increased in value between when you inherited it and when you decided to sell. For example, if you keep ownership of the house for several years, and it goes up in value by £25,000, then capital gains tax will be due on this amount when you complete your sale.
However, if you decide to sell your inherited property as soon as it comes into your possession, you will not usually need to pay capital gains tax on it. Instead, you will have to pay inheritance tax.
Keep in mind that you only usually pay Capital Gains Tax on a house that is not your primary residence. If you have lived there for the entire time you have owned it, CGT should not be due.
For more information about probate property, click the link to our webpage.
How can I reduce the Capital Gains Tax I pay?
In the UK, there is an ‘Annual Exempt Amount’ on which you don’t need to pay tax. This is currently £6,000 per year for people at the time of writing this blog and £3,000 for trusts. You may also be able to reduce your tax bill by deducting losses or claiming reliefs, although this depends on the asset.
Keep in mind that the UK government may decrease the annual exempt amount in the future, so you should research whether these figures have changed at the time of reading.
You may also wish to consider delaying the sale of a property if it will help reduce the capital gains tax you pay. For example, if you have already used up your CGT allowance in the current tax year, it often makes sense to wait until the next tax year begins before selling your property so you can access the allowance.
Another way you reduce your capital gains tax is by using your ISA allowance or giving money/assets to your spouse (or civil partner). You should seek professional guidance with any of these methods to ensure you are always compliant with the law.
Calculating how much Capital Gains Tax you have to pay
If you are a higher or additional rate taxpayer, you will need to pay 28% on your gains from residential property. If you are a basic rate taxpayer, it will be 20%.
The amount that CGT is due is the difference between what you bought it for and what you are selling it for. So, if your property has gone up by £50,000 when you have owned it, then you will need to pay 28% tax if you’re a higher level taxpayer (£14,000) or 20% if you’re a basic rate taxpayer (£10,000).
If you are stuck, there are plenty of free online Capital Gains Tax calculators that can make it easier for you to work out the amount due. Remember that, in some instances, the market value is used instead of the selling price, although this is less common.
When do you not need to pay Capital Gains Tax on a property?
As a general rule, you are exempt from paying Capital Gains Tax if the house you are selling is your primary residence. CGT is not usually due if it is the main or only place you have lived.
A few methods of proving that the house is your main residence include:
- Living there for a long time
- You don’t own any other houses
- Utility bills and bank statements all sent to that address
- Council tax payments
If you are at all unsure about whether CGT is due, you should speak to a legal or financial expert who can provide advice specific to your situation.
How much have house prices changed over the past decade?
While all the data is not yet available for 2024, figures have been published on how much house prices have increased between 2013 and 2023.
The areas that have seen the highest rise in prices are Waltham Forest and Hastings, which have experienced 119% and 115% growth, respectively.
Meanwhile, in Northern Ireland, properties at Causeway Coast and Glens have gone up by 93%, and houses in Armagh City, Banbridge and Craigavon have gone up by 84%.
The areas in Wales that have experienced the most change are Blaenau Gwent (92%) and Rhondda Cynon Taf (91%).
In Scotland, houses on the Shetland Islands have increased by 86% in value, and properties in West Lothian by 74%.
Aberdeen is the only place in the UK that experienced an on-average price decrease throughout the decade. Otherwise, almost all properties across the country have gone up – meaning that if you have owned your second house for 5 years or more, there is likely to be Capital Gains Tax due.
What happens if I have made a loss?
When you report a loss, the amount is deducted from the gains you made in the same tax year. If your total taxable gain is still higher than the tax-free allowance, you can deduct unused losses from previous tax years. If they reduce your gain to the tax-free allowance, you can carry forward the remaining losses to a future tax year.
