Inheriting a house from your parents when they pass away is, perhaps, the main way that family wealth is passed on down the generations. For those who have found that today’s house prices made it impossible for them to buy their own home, an inherited property can totally change the financial outlook for them and their family, whether they decide to live in it or sell it and buy something more suitable.
That said, from a practical point of view, the practicalities of inheriting a house are not something that even financially capable adults are generally familiar with, and it’s common to feel “I inherited a house, now what?” in this situation. This guide covers some of the main areas to be aware of when inheriting a house after a death.
Understanding inheritance tax on property
The tax consequences of inheriting a house after death are one of the first things most people want to know when they are named as a beneficiary of property in a Will – because these are often not well understood. This is partly because of the phrase ‘inheritance tax’ itself which can be taken to mean that the person who receives the inheritance is the one who has to pay tax. This is not the case. When inheriting a house UK law says that inheritance tax or ‘death duties’ are actually paid from the deceased’s estate in most cases.
Inheritance tax on house bequests (and the rest of the estate’s value) is paid on the value of the estate over £325,000 (or £425,000 the deceased leaves their home to their children or grandchildren) if at a rate of 40% though this is reduced if at least 10% of the estate is left to charity.
Of course, if you later sell the house you’ve inherited and you already own the home in which you live, you may need to pay Capital Gains Tax if it has increased in value since its previous owner died and, of course, income tax is payable on any profits you make from renting it out, depending on your other income levels.
There is no Stamp Duty on inherited property.
Inheriting a house with a mortgage
If the house you’ve inherited had a mortgage on it, there are certain complications which don’t apply to inheriting a house that is paid off.
The first of these is that the lender has the right to require that the remaining loan is repaid. That said, most lenders understand that bereavement is a difficult time and that there’s a lot going on, and are usually sympathetic about the timescale for this and are often happy to put mortgage payments on hold while probate is sorted out.
If the person who has died had life insurance, this might cover the outstanding debt, but if they didn’t, and you decide not to sell the inherited property to pay off the mortgage, you will usually need to take out a new mortgage in your own name. If you plan to then let the house out, you will need a buy-to-let mortgage.
Other things to know about transfer of property after death
Transfer of property after death without Will
When someone dies intestate (without a will), their estate passes to their spouse or civil partner if they have one. If they do not, it is shared equally between any children they have, and if their children are no longer alive, the estate passes to their grandchildren. If they are single and have no descendants, but one or more of their parents is still alive, they are next in line to inherit. After that any brothers or sisters would inherit, and if they too have died, the estate is shared between their children – the deceased’s nephews and nieces. The government portal gov.uk is a useful starting point for finding more information on a range of other family situations.
Owning more than one home
If you already own your own home and then inherit a property, you must tell HMRC within two years which property is your main home.
Inheriting a house with siblings
This is one of the most common situations people find themselves in when inheriting a house, because the last surviving parent leaves their propoerty to their children. You and your brothers or sisters then need to decide how you want to own it legally. There are two options:
- As joint tenants where you have equal rights to the whole property and your share automatically passes to the other joint tenants on your death. This means that only the final surviving sibling is able to leave the property to others in their will.
- As tenants in common where you each own a defined share of the property which you pass on in your will.
In both cases, if you are inheriting a house and selling it, all of the siblings would have to agree to this course of action.
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