Inheritance Tax and Capital Gains Tax on Inherited Property
Understanding inheritance tax and capital gains tax on inherited property in the UK is essential for anyone managing an estate. These two taxes can significantly impact the value of inherited assets, especially property. Without proper planning, families may find themselves facing unexpected tax bills during an already difficult time.
In this guide, we explain how both taxes work, who’s responsible, and most importantly—how you can reduce or even avoid unnecessary liabilities.
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What Is Inheritance Tax on Property?
Inheritance tax (IHT) is a tax applied to an estate when someone passes away. In the UK, the standard threshold is £325,000. If the value of the estate exceeds this amount, a 40% tax rate may apply to the excess. However, if the deceased leaves their home to children or grandchildren, an additional £175,000 “residence nil-rate band” can apply.
When property is the main or most valuable asset in an estate, inheritance tax can pose a significant challenge. Without early planning, family members may be forced to sell property just to pay the tax bill.
Who Pays Inheritance Tax?
Usually, the executor or administrator of the estate pays the inheritance tax before the assets are distributed. The funds may come from the estate itself or, in some cases, the beneficiaries. It’s critical to know this in advance and plan accordingly to avoid hardship.
How to Reduce Inheritance Tax on Property
There are several ways to reduce or avoid inheritance tax:
- Gifting property early (7 years before death to qualify for full exemption)
- Placing property in a trust
- Using life insurance policies written in trust to cover the IHT bill
- Leaving property to a spouse or civil partner (IHT exempt)
Learn more on our Inheritance Tax Planning page.
Capital Gains Tax on Inherited Property Explained
Unlike inheritance tax, capital gains tax (CGT) is not due immediately when you inherit property. Instead, it’s charged when you sell the inherited property for a gain. The gain is calculated based on the difference between the property’s value at the time of inheritance and its value at the time of sale.
Do You Always Pay CGT on Inherited Property?
You only pay CGT if you make a profit from selling the property. If you decide to move into the property or keep it without selling, CGT doesn’t apply. If you do sell, there are ways to reduce your CGT bill:
- Deduct allowable expenses like solicitor or estate agent fees
- Use your annual CGT exemption (£6,000 for individuals in 2024/25)
- Transfer ownership to a spouse to utilise both exemptions
How Inheritance Tax and Capital Gains Tax Interact
Both taxes can apply to the same property—but not at the same time. Inheritance tax applies when the property is inherited, and capital gains tax applies when it is later sold.
This distinction matters. For example, if you inherit a property worth £500,000 and sell it five years later for £600,000, you may face CGT on the £100,000 gain (minus allowances). However, if the property was sold by the estate before distribution, CGT may be handled differently.
Combining effective inheritance tax and capital gains tax planning is vital for reducing the overall tax burden.
Strategies to Minimise Inheritance Tax and Capital Gains Tax
If your estate includes property, it’s important to understand how to protect its value for your beneficiaries. Here are effective strategies:
1. Set Up a Trust
Using a trust can help keep property out of your estate, reducing exposure to inheritance tax. Trusts can also help control how and when beneficiaries access assets, protecting the property from misuse, divorce, or creditors.
2. Gifting Property During Your Lifetime
If you gift property and live for at least 7 more years, the gift is generally IHT-free. However, CGT might still apply, so professional advice is essential.
3. Use Main Residence Relief
If the inherited property was your main home before selling, you may be eligible for Private Residence Relief, reducing or eliminating your CGT liability.
4. Get a Property Valuation
Having a professional valuation of the property at the time of inheritance is key to calculating any future capital gains accurately.
Common Scenarios and Examples
Let’s look at a typical scenario. John inherits his father’s house in 2023 valued at £400,000. He sells it in 2025 for £470,000. John pays CGT only on the £70,000 gain, after applying exemptions.
Now consider this: John’s father had an estate worth £700,000 and left it to John. The property qualified for both the standard nil-rate band (£325,000) and the residence nil-rate band (£175,000), totalling £500,000 tax-free. John would owe IHT on the remaining £200,000, taxed at 40%—a £80,000 bill. Proper planning could have reduced or eliminated this.
When to Get Professional Help
Tax rules are complex and ever-changing. Working with a qualified estate planner ensures you get the most out of tax reliefs and avoid penalties. If you’re dealing with inheritance tax and capital gains tax on inherited property, expert guidance can make a big difference in what you keep vs what you lose to HMRC.
Book a free consultation today or explore our pricing plans to see how affordable expert estate advice can be.
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Conclusion
Inheritance tax and capital gains tax on inherited property are major considerations for anyone looking to preserve wealth. While these taxes can be complex, with smart planning and professional advice, they can be managed or even avoided.
Don’t let unexpected tax bills catch your family off guard. Start planning today. Book your free consultation and take the first step toward securing your legacy.