I have inherited a share of property. Does this have any tax consequences?
Inheritance Tax (IHT)
When a property is inherited, the estate may be subject to inheritance tax on the excess over the nil rate band. If the property was the deceased’s main home, and passes to direct descendants, the estate may qualify for an additional relief, termed a residence nil rate band. A previous insight has covered this topic in detail.
This can lead to an additional nil rate band of up to £350,000, which would otherwise be taxed at 40%, giving rise to overall tax relief of up to £140,000. If this has not been achieved by the will, it is possible that this could instead be achieved through use of a deed of variation.
Capital Gains Tax (CGT)
When a property is inherited, its base cost for CGT purposes will be its probate value. This means that only its growth above this value will be subject to CGT on future gifts or transfers.
If you already own a home, and begin to use the inherited property as a second home, the CGT position needs to be considered in detail. This is because an individual can only have one home on which Principal Private Residence (PPR) Relief is claimed. PPR is the relief which exempts the sale of an individual’s main home from CGT.
Where an individual has multiple residences (as opposed to properties they own), the default position is that this home is the property which an individual primarily lives in, and is determined by a question of fact. The main factors considered include:
- Where an individual is registered to vote;
- Whether the property is owned or rented;
- The amount of time spent at the property;
- Family ties;
- Where the majority of an individual’s personal possessions are kept;
- Where an individual is registered with a GP/dentist;
- Where their correspondence is sent;
- Where their partner resides;
- Where their children go to school (if applicable).
However, for CGT purposes, it is possible for an election to be made within two years of acquiring a new residence. The effect of this election is to allow the person making the election to determine which residence is to be treated as an individual’s main home. Once this election is made, it can be varied at any time, backdated for up to two years.
However, if an election is not made within two years of a new residence being acquired, an election can then only be made if the combination of residences changes. Until then, the main residence will be determined by HMRC as a question of fact, and this may have disadvantageous CGT consequences.
It is worth noting that if an individual’s only other residence is a property which they are living in on a short-term tenancy, there is no time limit for this election to be made.
Stamp Duty Land Tax (SDLT)
There is no SDLT on inheritance of a property, however, it is possible that through inheriting a property, there could be disadvantageous SDLT consequences. This occurs in either of two main scenarios.
The first is where the individual inheriting a property has never previously owned one. There is a relief from SDLT called ‘First-time Buyer’s Relief’, which acts to reduce SDLT on a first home. However, this only applies to individuals who have never owned a major interest (ie. any freehold or leasehold interest) in a property. This means that inheritance of a share of a residential property could prevent this relief from applying.
The second is where an individual moves from a rental property into a newly acquired residential property. As a result of owning a second property at this date, they may be required to pay higher rates of SDLT. They will not then be able to claim a rebate on disposal of the property held in the estate because this is not their main home. This means that they therefore will not qualify for the relief from replacement of their main home.
It is worth noting at this point, that the ability for CGT purposes to make an election to classify a property as a main home does not apply for SDLT. For SDLT, this is always determined as a question of fact.
Some councils charge a premium on council tax for second homes, rather than an individual’s primary or main residence. This will again be considered as a question of fact, and so an individual may be unexpectedly caught by this rule.
Care needs to be taken to ensure that the tax consequences from inheriting a share in a property are correctly understood and appropriately navigated. This will enable the optimum tax position to be achieved.