Inheriting property in the UK can be both a financial asset and a potential tax challenge. Many beneficiaries fail to consider Capital Gains Tax (CGT) when disposing of inherited property—only to be caught out by unexpected liabilities and strict reporting rules. In this guide, we walk through everything you need to know to navigate CGT efficiently, legally, and with maximum financial advantage.
What is Capital Gains Tax (CGT)?
Capital Gains Tax is a tax on the profit made when selling an asset that has increased in value. In the context of inherited property, the gain is calculated from the property’s market value at the date of death (known as the probate value) to the eventual sale price.
Example: If you inherit a house worth £300,000 and sell it three years later for £375,000, your taxable gain is £75,000.
CGT is paid only upon disposal of the asset, not upon inheritance.
Establishing an Accurate Probate Value
Accurate valuation is critical. HMRC expects the valuation used for probate to reflect the open market value at the date of death.
Tips for ensuring accuracy:
- Get a RICS-qualified chartered surveyor to value the property
- If in doubt, obtain multiple estate agent valuations for comparison
- Ensure documentation is preserved: probate forms, valuation letters, correspondence
Errors or underestimations in probate value can be flagged during HMRC reviews and may lead to penalties.
Calculating the CGT on Inherited Property
Once you’ve established the base cost, calculating the gain is straightforward:
Gain = Sale Price – Probate Value – Allowable Expenses – Annual CGT Allowance
Allowable expenses include:
- Solicitor and estate agent fees
- Costs of capital improvements
- Certain marketing and survey costs for the sale
The annual CGT exemption in 2024/25 is £6,000. If you jointly own the property, each co-owner gets their own allowance.
CGT Rates and Thresholds
CGT on residential property is taxed at:
- 18% for basic-rate taxpayers
- 28% for higher-rate and additional-rate taxpayers
Whether you fall into the basic or higher-rate band depends on your total taxable income. CGT is calculated on top of income, so be aware that a property sale can push you into a higher bracket.
60-Day Reporting Rule
Since April 2020, all UK residential property sales resulting in a CGT liability must be reported to HMRC within 60 days of completion. This applies even if:
- You are a UK resident
- You do not usually file a tax return
You must:
- Register on the HMRC CGT digital service
- Submit the return online
- Pay any CGT owed within 60 days
Failing to do so can result in a £100 fine (increasing with continued delay).
Can You Use Private Residence Relief?
Generally, inherited properties do not qualify for Private Residence Relief (PPR) unless:
- You moved into the home after inheriting it
- It became your main residence for a qualifying period
In such cases, you may claim PPR for the time you lived there, plus the final 9 months of ownership.
Example: You lived in the property for 2 years post-inheritance and then sold it. You may qualify for up to 2 years + 9 months of exemption.
Gifting vs Inheriting Property
There’s often confusion between property gifted during a person’s lifetime versus passed through inheritance.
Key differences:
- Gifted properties are treated as if sold at market value, triggering CGT at the time of transfer by the donor
- Inherited properties do not incur CGT until sale and benefit from a stepped-up base value
Inheritance is often more tax-efficient due to the base cost reset.
Complex Ownership Scenarios
Inherited properties may be owned jointly with siblings or other family members. CGT must be calculated and paid separately by each owner based on their share of the gain.
All co-owners must:
- File separate CGT returns (if required)
- Agree on sale price and cost split
- Keep individual records of their share of expenses
Disputes over expense allocation or unequal ownership can cause reporting errors and delays.
Real-World Case Study
Scenario: Alice and Ben inherited their father’s London flat in 2017. The probate value was £400,000. In 2024, they sold it for £520,000.
- Total gain: £120,000
- Each inherits 50%, so gain per person: £60,000
- Less annual allowance: £6,000
- Taxable gain: £54,000
- Assuming higher-rate status: 28% tax
- Tax due per person: £15,120
- Total CGT: £30,240
They also incurred £4,000 each in legal/agent fees which were deductible, reducing their tax burden slightly.
Handling CGT for Non-Residents
If you live abroad but inherit UK property:
- You are still liable for UK CGT on any gain
- You must report via HMRC’s digital platform within 60 days
- Currency exchange should be based on HMRC’s official exchange rate
Many non-residents are unaware of these rules and face fines. Double-tax treaties may affect your obligations in your country of residence.
CGT and Trust-Based Inheritances
In some cases, you may inherit a property through a trust. Tax obligations vary depending on the structure:
- Discretionary trusts: the trust pays CGT
- Bare trusts: beneficiary is responsible
Trusts also have a lower CGT exemption (£3,000) and may qualify for hold-over relief, which defers CGT to the beneficiary.
Trust arrangements are complex—always consult a tax professional.
Inheritance Planning Tips for Future Sellers
If you own property and wish to pass it on efficiently:
- Use updated wills and clear documentation
- Consider whether to gift or pass property via inheritance
- Explore if trusts or Business Relief apply
Speak to an estate planner or accountant before transferring any major assets to ensure tax efficiency.
Common Mistakes to Avoid
- Using informal valuations (e.g., Zoopla) instead of RICS reports
- Missing the 60-day reporting deadline
- Not claiming deductible expenses
- Incorrectly splitting gains in joint ownerships
Proper recordkeeping and early planning are essential to minimise tax and avoid HMRC scrutiny.
Final Checklist for Beneficiaries
✅ Obtain a professional valuation at date of death
✅ Identify and document all ownership shares
✅ Track deductible costs (legal, sale, improvements)
✅ File CGT return within 60 days of sale
✅ Seek expert help for trusts or cross-border matters
Conclusion: Don’t Let CGT Erode Your Inheritance
Capital Gains Tax on inherited property can be a minefield—but it’s avoidable with careful planning, proper valuation, and timely reporting. Whether you’re an heir or planning your own estate, understanding these tax dynamics ensures smoother transitions and protects family wealth.
Frequently Asked Questions
Q1: Do I owe CGT if I don’t sell the property?
No, CGT only applies when you sell or dispose of the asset.
Q2: Can I claim CGT relief if I rent out the inherited property?
Letting does not trigger CGT, but rental income is subject to income tax. CGT applies upon sale.
Q3: What if I sell the property at a loss?
Losses can be used to offset future capital gains. You must report the loss to HMRC
Q4: How do I know if my gain is taxable?
If your gain exceeds the annual CGT allowance after deducting expenses, it’s taxable.
Q5: Can I use my spouse’s allowance?
Only if they are also a legal owner of the property.
Q6: What if I inherited property with a mortgage?
The outstanding mortgage does not affect CGT but may impact IHT and financial planning.
