Quick answer: Capital gains tax on inherited property is based on the market value at date of death (your base cost). You pay CGT on gains when you sell, after allowances and reliefs. Inheritance Tax is separate.

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Inheriting property can be both a blessing and a source of confusion, especially when it comes to tax. Many people in England and Wales find themselves unsure about what they owe, when, and how to report it. This guide will help you understand how Capital Gains Tax (CGT) applies to inherited property, how it differs from Inheritance Tax, and what you need to do if you decide to sell.

Understanding the Basics: CGT vs. Inheritance Tax

First, it’s important to separate two taxes that often get mixed up:

• Inheritance Tax (IHT): This is assessed on the estate of the person who has died. If you’re a beneficiary, you don’t pay IHT directly unless you receive assets from a trust or the estate is very large.

• Capital Gains Tax (CGT): This only comes into play if you sell the property you’ve inherited and make a profit above the base value set at the date of death.

The two taxes have different rules, timelines, and reporting requirements. Mixing them up can lead to costly mistakes.

Your Base Cost: The Probate Value

When you inherit property, your “base cost” for CGT purposes is the market value at the date of death—often called the probate value. This is the figure used to calculate any gain when you eventually sell.

Why is this important?
If you sell the property for more than the probate value, the difference (after deducting allowable costs and exemptions) is your taxable gain. If you sell for less, you may have a loss you can use to offset other gains.

Action:
Keep a copy of the formal probate valuation. If you don’t have one, consider getting a professional valuation now. If HMRC ever queries your figures, you’ll need evidence.

CGT Rates and Allowances

From the 2024/25 tax year, CGT rates on residential property are:

• 18% for gains falling within your basic income tax band

• 24% for gains above that band

Everyone gets an annual CGT exemption (the “annual exempt amount”), which reduces the taxable gain. If you have other capital losses, you can offset these against your gain.

Example:
Priya inherits a flat valued at £300,000 (probate value). She sells it for £360,000, incurring £5,000 in selling costs (estate agent, legal fees). Her gain is:

• Sale price: £360,000

• Less probate value: £300,000

• Less costs: £5,000

• Taxable gain: £55,000

She can then deduct her annual exemption and any other losses. The rate she pays depends on her total income for the year.

Reliefs: Principal Private Residence (PPR)

If you lived in the inherited property as your main home before selling, you may be able to claim Principal Private Residence relief. This can reduce or even eliminate your CGT liability for the period you occupied the property.

Tip:
If you only lived there for part of the ownership, relief is apportioned. Keep records of when you moved in and out.

Reporting and Deadlines

If you sell a residential property and CGT is due, you must report the sale and pay any tax within 60 days of completion using the UK property return system. Missing this deadline can result in penalties and interest.

Action Steps:

• Work out your gain as soon as you sell.

• Submit the UK property return online within 60 days.

• Pay any CGT due by the same deadline.

If no CGT is due (for example, if your gain is covered by exemptions or reliefs), you don’t need to file a property return, but you should still keep records.

Common Pitfalls

• Mixing up IHT and CGT: They are separate taxes with different rules. Don’t assume paying one covers the other.

• No formal valuation: Without a proper probate valuation, you may struggle to defend your base cost if HMRC asks questions years later.

• Missing the 60-day deadline: Late reporting can lead to penalties and interest, even if the tax owed is small.

• Not claiming reliefs or offsetting losses: If you lived in the property or have other capital losses, make sure you claim what you’re entitled to.

Real Example

Priya inherits a flat valued at £300,000. She sells it for £360,000 after £5,000 in costs. Her taxable gain is £55,000. She deducts her annual exemption and any other losses. If her income is below the higher-rate threshold, she pays CGT at 18%; if above, at 24%. If she lived in the flat as her main home, she may be able to reduce her gain further with PPR relief.

Practical Checklist

• Keep the probate valuation and all sale documents.

• Calculate your gain using the probate value and deduct allowable costs.

• Check if you qualify for Principal Private Residence relief.

• Offset any capital losses from other assets.

• Report the sale and pay CGT within 60 days if tax is due.

• Don’t confuse CGT with Inheritance Tax—they are separate.

Inheriting property brings both opportunity and responsibility. By understanding how CGT works, keeping good records, and meeting deadlines, you can avoid unnecessary stress and make the most of your inheritance.

Disclaimer: This article provides general information for educational purposes only. It is not legal, medical, financial or tax advice. Outcomes can vary based on your personal circumstances.