Receiving a property through inheritance can be financially rewarding in the UK, but it may also give rise to tax obligations. Most people think of Inheritance Tax (IHT) first, but there’s another tax for which many are not prepared, like Capital Gains Tax (CGT). If you choose to sell the inherited property, your sale may be subject to CGT. Fortunately, there are genuine ways to reduce or avoid significant CGT exposure. In this guide we will explain how CGT applies to inherited properties, how and when the application of CGT may arise, and strategies you can employ to reduce CGT.
What is Capital Gains Tax?
Capital gains tax is a tax you pay on the profit when you sell something that has increased in value. In the case of property, you abstract the gain from the deceased person’s market value as at the date of their death, not the original purchase price. This means you are only paying tax on the gain in value between the time you inherited it and the time it sold for more than its probate value.
CGT does not apply just because you inherit a property. CGT will only be payable if you sell the inherited property for a value above the current probate value. If you continue to use the property as your main home, some reliefs may mean you won’t have to pay CGT. However, if the property is sold or the property is rented out as an investment, CGT would normally apply.
How to Determine the Probate Value
The probate value is the fair market value of the property at the date of death of the deceased person. A professional valuation marks the property as “probate value” and is important when ascertaining any future CGT liability. Getting a professional valuation would be valuable to avoid a dispute with HMRC and ensure you only pay tax on real gains.
If you engage a qualified surveyor or estate agent to ascertain the probate value, you will have a fighting chance should HMRC query it. Due to a demise, someone is declared as “executor,” thus the valuation is determined in the executor’s capacity as agent for an estate. Otherwise, current market conditions would determine the value. Failure to get a professional valuation or an underestimated valuation may create CGT problems in the future if the property’s sale price goes significantly above the valuation.
Calculating CGT on Property Inherited
Step-by-step CGT calculations are given below:
1. Determine the sale price of the property
2. Less the selling costs (i.e., estate agent’s fees, legal fees)
3. Less the probate value
4. Less allowable expenses or claim reliefs
5. Determine the CGT rate (18% or 28% for residential property, based on your income)
CGT Allowances and Exemptions
Everyone has an annual CGT allowance, which will reduce your chargeable gain that is subject to taxation. In 2025/26, the allowance is lower than in previous years, and therefore tax planning is more important.
Ways to Mitigate or Avoid Capital Gains Tax
1. Occupy the Property as Your Principal Residence: If you occupy the inherited property as your principal residence, you may qualify for Private Residence Relief (PRR), which will exempt you from CGT when you sell. The longer you reside in the property, the greater relief you may be able to claim.
2. Utilize Your Annual CGT Allowance: Sell the property in the tax year when you can utilize your annual exemption, which will reduce your taxable gain. If there are multiple beneficiaries of the property, each can utilize their allowance, which will further reduce CGT payable.
3. Sale in Joint Names: If the property is inherited jointly, it means that when it does sell, each owner can apply their CGT allowance, and this can prove beneficial where there are large gains.
4. Time the Sale: If it is possible to defer the sale time to a new tax year, you may provide yourself with access to multiple years’ allowance depending on your financial planning. Considering the sale when you have lower personal income may allow you to gain access to lower CGT rates.
5. Transfer Property to a Class or Civil Partner: Transfers between class partners or civil partners are free from CGT. This allows couples to double their CGT allowances and possibly pay even lower rates if transfers are made to a partner with a lower tax bracket.
Special Reliefs that are beneficial
If the property was your main home for some or all of the period you owned it, PRR will allow you to exempt all or part of the gain. If you lived in the property following an inheritance, you may qualify for partial or full PRR.
If after living in the inherited property, you were to then rent it out, letting relief may be able to reduce your CGT liability. However, factors associated with changes in respect of letting relief may have limited access to this relief, and you are advised to seek relevant professional advice.
Reducing CGT Through Expenses and Improvements
Taxable gain is reduced through your ability to deduct allowable selling costs, e.g., estate agent, solicitor, and advertising costs. This can help decrease the amount of profit that HMRC regards as taxable.
If you spent money on important home improvements (e.g., extensions, new roofs), the costs of the improvements can be deducted from your gain, but normal maintenance and repairs cannot be deducted.
Gifting or Transferring the Property
If you gift your inherited property, you may still need to pay CGT on the sale if the value has increased since you inherited it. However, gifting to a spouse or civil partner is exempt from CGT, so this makes it a viable option for tax planning.
If you place the property in a trust, it can help with your estate planning, but it has its own implications for taxes, and there can be a complex issue about CGT. Completing a transfer to a trust should be done with professional advice to avoid any unexpected CGT charge.
Keeping Accurate Records
Keeping accurate and full records of your probate valuation, improvement costs, and selling expenses will ensure that CGT is appropriately calculated. Good records will make it easier to defend your figures if HMRC asks you.
When to get professional advice
Inheritance tax and CGT rules can be complex, not to mention that they can change. Then you might need a tax advisor and/or a solicitor to help you identify reliefs, calculate liabilities, and structure the disposal of property to limit tax. If the property is of high value or if there are multiple beneficiaries, professional advice is particularly important.