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Capital Gains Tax (CGT) on the sale of an inherited property is usually only due on any increase in the value of the property from the point at which it was inherited, after deducting allowable expenses.
The estate, which owns the property after a person dies, does not have to pay any CGT on property or assets that weren’t sold before the person died.
This means that the CGT base cost of an asset is usually uplifted to market value without any CGT liability arising known as CGT uplift on death. This effectively wipes out any unrealised capital gain because Inheritance Tax (IHT) is charged instead.
The benefit to this CGT uplift on death most acutely falls on a surviving spouse or civil partner. In this case, the transfer will be exempt from IHT the assets will be passed on to the surviving spouse with a CGT uplift to the time of death. There are some effective tax planning tools available to ensure that maximum CGT is wiped out when one spouse may be known to have a short life expectancy.
For example, a deceased spouse may have invested in an investment property and built up a large capital gain. The transfer of these assets upon death will mean that the surviving spouse will be treated for CGT purposes as if they had acquired the assets concerned at the current market value on the date of their spouse's death. This is the case whether or not any IHT is payable.
The surviving spouse or civil partner could then sell the assets with significantly less or no liability to CGT. Alternatively, the surviving spouse or civil partner could transfer the property to his / her children. If the gifting spouse remains alive for at least seven years, there should be no IHT on the transfer and the cost price of the asset would be based on the transfer date for CGT purposes. In fact, some savings would begin to accrue on the transfer after just three years via tapering of the percentage which is still chargeable to IHT.
This effective exemption from CGT can encourage some people to hold assets for life to allow their beneficiaries to avoid a large CGT bill. As we mentioned, the most significant benefit is when the asset is left to a spouse or civil partner as there is also no liability to IHT. Assets that are left to other beneficiaries may still be liable for IHT.
If someone inherits an asset, then they won’t have to pay any CGT until the asset is sold. The base cost of the asset will be its value at the time of inheritance. Since the parties involved in receiving an inheritance are deemed connected parties then the market value is the tax value for all transfers. The rules on determining market value for IHT purposes need to be adhered to and can be subject to review by HMRC.
Once an asset has been inherited it becomes the property of the beneficiary. We would recommend the beneficiaries keep a record of the valuation and transfer dates of any assets as this will be required when a sale is made.
If the property or asset is sold during probate and its value rose since the person died, there may be CGT to pay on the increase in value from when the person died to when the asset was sold or given away. The benefactor(s) would then report and pay any CGT due.
The rate of CGT payable by beneficiaries, who dispose of inherited property, depends on the beneficiary’s own individual circumstances and the nature of the property.
For example, a beneficiary had a house that was listed as being valued at £300,000 when they inherited it. The property was then sold for the same amount a few months later. In this scenario, no CGT would be due on the sale.
However, if the same house that was valued at £300,000 was kept as an investment property and then sold, after expenses and allowances, for more than £300,000 some years later then CGT would be due. CGT would be payable on the profit, less any allowable expenses. In addition, taxpayers are allowed to make a certain amount of tax-free capital gains each year. The ‘annual exempt amount’ from CGT for the 2020-21 tax year is £12,300.