CGT Implications of Inheriting a House From Your Parents
- MAZ
- Jun 23
- 15 min read
The Audio Summary of the Key Points of the Article:
Understanding CGT When Inheriting a House
Do You Pay CGT When You Inherit a House?
Let’s get straight to the point: you don’t pay Capital Gains Tax (CGT) when you inherit a house from your parents in the UK. HMRC doesn’t consider inheritance a “disposal,” so no tax is triggered at that moment. Instead, CGT comes into play if you sell the property later and it’s increased in value since the date of your parent’s death. The starting point for calculating any gain is the probate value—the market value of the house at the time of death, as determined during the probate process. For example, if your parents’ house in Bristol was valued at £350,000 when they passed away in 2024, that’s your baseline for any future CGT calculations. This rule applies across the UK, whether you’re in England, Scotland, Wales, or Northern Ireland.
What Is the CGT Allowance for 2025/26?
Now, here’s where it gets practical. Every UK taxpayer gets an Annual Exempt Amount (AEA) for CGT, which for the 2025/26 tax year is £3,000 per person. This means you can make up to £3,000 in capital gains across all your assets (not just the inherited house) before CGT kicks in. If you’re married or in a civil partnership, you and your spouse can combine your allowances, giving you a total of £6,000 tax-free. But here’s the catch: you can’t carry forward unused allowances to future years, so use it or lose it. For instance, if you sell the inherited house and make a £10,000 gain, you’d subtract your £3,000 AEA, leaving £7,000 taxable. If you’re a business owner selling other assets (like company shares), this allowance applies across all disposals, so plan carefully to maximize it.
How Are CGT Rates Applied in 2025/26?
So, you’ve inherited a house, and you’re thinking of selling it. The CGT rate you’ll pay depends on your income tax band and the type of asset. For the 2025/26 tax year, CGT rates for residential property (like an inherited house that’s not your main home) are:
18% for basic rate taxpayers (income up to £50,270).
24% for higher or additional rate taxpayers (income over £50,270).
Here’s how it works: your taxable gain is added to your income for the year to determine which tax band applies. If you’re a basic rate taxpayer with £30,000 income after your £12,570 personal allowance, you have £20,270 left in your basic rate band. If your gain is £25,000, the first £20,270 is taxed at 18%, and the remaining £4,730 at 24%. For business owners, high income from profits or dividends can push you into the higher rate, increasing your CGT bill. Below is a table to clarify:
Tax Band | Income Threshold | CGT Rate (Residential Property) |
Basic Rate | Up to £50,270 | 18% |
Higher/Additional Rate | Over £50,270 | 24% |
Table 1: CGT Rates for Residential Property in 2025/26
How Do You Calculate CGT on an Inherited House?
Let’s break this down with a real-world example. Imagine you’re Lowri, a teacher in Cardiff, who inherited her parents’ house in Swansea, valued at £300,000 in March 2024. You sell it in August 2025 for £340,000. Here’s how to calculate your CGT:
Determine the Gain: Sale price (£340,000) minus probate value (£300,000) = £40,000 gain.
Deduct Allowable Costs: Subtract costs like estate agent fees (£5,000) and solicitor fees (£2,000). New gain = £40,000 - £7,000 = £33,000.
Apply the AEA: Subtract your £3,000 allowance. Taxable gain = £33,000 - £3,000 = £30,000.
Calculate Tax: If your income is £35,000, you have £15,270 left in your basic rate band (£50,270 - £35,000). Tax £15,270 at 18% (£2,748.60) and £14,730 at 24% (£3,535.20). Total CGT = £6,283.80.
You must report this to HMRC within 60 days of the sale completion (by October 2025) and pay by 31 January 2026 via Self-Assessment. Keep records of the probate value and costs—HMRC is picky about paperwork.
What If You Don’t Sell the House Right Away?
Now, consider this: if you hold onto the house for years, its value might skyrocket, increasing your CGT liability. Say the Swansea house jumps to £400,000 by 2030. Your gain would be £400,000 - £300,000 = £100,000, minus costs and your AEA. Delaying the sale might seem smart, but property value growth can outpace inflation, leaving you with a heftier tax bill. For business owners, this could complicate cash flow if you’re also selling business assets. On the flip side, if the property’s value drops below the probate value, you could claim a capital loss to offset future gains, which is handy if you’re disposing of other assets.
Does Private Residence Relief Apply?
Here’s a game-changer: if you move into the inherited house and make it your main residence, you might qualify for Private Residence Relief (PRR), which can exempt all or part of your gain from CGT. To qualify, you must genuinely live there—not just visit occasionally. If you own two properties (say, your own home and the inherited one), you must notify HMRC which is your main residence within 2 years of acquiring the second property. If you don’t, HMRC decides based on where you spend most time, which could lead to unexpected tax bills. For example, if Lowri moves into the Swansea house for two years before selling, the gain during that period might be fully or partially exempt. But if she rents it out instead, PRR is reduced, and she might face CGT on the full gain.
Advanced Strategies and Special Cases for CGT on Inherited Property
Can You Reduce CGT with Smart Planning?
Now, let’s get into the nitty-gritty of cutting your CGT bill. If you’ve inherited a house and are eyeing a sale, there are clever ways to minimize your tax liability. Timing is everything. For instance, if you’re close to the end of the tax year (5 April), consider delaying the sale to spread gains across two tax years, using two Annual Exempt Amounts (£3,000 each year, or £6,000 total). Say you’re Alun, a business owner in Leeds, who inherited a house worth £400,000 in 2024. Selling in June 2025 for £450,000 gives you a £50,000 gain. If you wait until April 2026 to complete the sale, you could use your 2025/26 and 2026/27 AEAs, reducing your taxable gain by £6,000 instead of £3,000. Just make sure to check with your solicitor to avoid delays that could push you into a higher tax bracket due to income spikes.
What If You Rent Out the Inherited House?
Be careful! Renting out the inherited house before selling can complicate your CGT. If you let the property, you lose some or all of your Private Residence Relief (PRR), as the period it’s rented counts as a taxable gain period. For example, Sioned, a nurse in Newport, inherits her parents’ house worth £320,000 in 2023. She rents it out for three years before selling it in 2025 for £360,000, making a £40,000 gain. Since she never lived there, PRR doesn’t apply, and she’s liable for CGT on the full £40,000 (minus costs and AEA). However, if she’d lived in the house for one year before renting, she could claim PRR for that period, plus the final 9 months of ownership (a relief rule for 2025/26), reducing her taxable gain. If you’re a business owner, renting out the property through a company could add complexity—consult an accountant to avoid double taxation.
How Do Trusts Affect CGT on Inherited Property?
Now, here’s a curveball: what if the house is left in a trust? Trusts are common in estate planning, especially if your parents wanted to control how the property is used after their death. If you inherit via a discretionary trust, the trustees are responsible for CGT if they sell the property. The trust gets its own AEA (£3,000 for 2025/26), but the CGT rates are the same as for individuals (18% or 24%). If the trust distributes the house to you, the transfer isn’t taxable, but the probate value becomes your base cost for future CGT calculations. For example, in 2024, a trust in Manchester holds a house valued at £500,000. The trustees transfer it to you in 2025, and you sell it for £550,000. Your gain is £50,000, taxed as if you inherited directly. Business owners with trusts should watch out: HMRC scrutinizes trust arrangements to prevent tax avoidance, so ensure all paperwork is watertight.
What About Non-Residents Inheriting a UK Property?
Here’s something not everyone thinks about: if you’re living abroad when you inherit a UK house, you’re still subject to CGT on any sale, thanks to rules introduced in 2015. Non-residents pay the same CGT rates (18% or 24%) on UK residential property gains, but you must report the sale to HMRC within 60 days, even if no tax is due. For instance, Dafydd, a software developer who moved to Canada, inherits a house in Bangor worth £280,000 in 2024. He sells it in 2025 for £310,000, making a £30,000 gain. After his £3,000 AEA, he pays CGT on £27,000, calculated based on his UK income (if any). Non-residents can’t claim PRR unless they’ve lived in the property as their main home for a period, which is rare. If you’re a business owner operating internationally, check for double taxation treaties to avoid paying CGT in both countries.
Can Improvements Reduce Your CGT Bill?
Now, consider this: spending money to improve the house can lower your CGT. Costs for significant upgrades—like adding a conservatory or renovating the kitchen—are deductible from your gain, unlike routine maintenance (e.g., painting). Let’s say Rhiannon, a florist in Bath, inherits a house worth £350,000 in 2024. She spends £20,000 on a new extension, then sells for £400,000 in 2025. Her gain is £400,000 - £350,000 - £20,000 (improvements) = £30,000, minus her £3,000 AEA, leaving £27,000 taxable. Keep receipts for all improvements, as HMRC may ask for proof. For business owners, if you’re using business funds for renovations, ensure clear separation from personal expenses to avoid HMRC queries.
How Do Business Owners Handle CGT Differently?
So, the question is: how does being a business owner change the game? If you run a company, your income from dividends or profits might push you into the higher CGT rate (24%) quickly. Plus, if you transfer the inherited house into your business (e.g., as a rental property), you could trigger CGT immediately, as it’s treated as a disposal at market value. For example, in 2023, Gwilym, a Cardiff entrepreneur, inherited a house worth £300,000. He transfers it to his property company in 2025, valued at £320,000. He pays CGT on the £20,000 gain, even though he didn’t sell it. To avoid this, some business owners keep inherited properties in their personal name and rent them out privately, claiming PRR if they live there first. Always consult a CGT advisor to align your business and personal tax strategies.
Scenario | CGT Implication | Key Action |
Renting Out Property | Loss of PRR for rental period; full gain taxable unless you lived there previously. | Consider living in the property to claim partial PRR. |
Property in Trust | Trust pays CGT on sale; transfer to beneficiary uses probate value as base cost. | Ensure trust complies with HMRC rules; keep detailed records. |
Non-Resident Beneficiary | CGT applies on sale; report within 60 days; no PRR unless main residence. | Check double taxation treaties; report via HMRC’s non-resident portal. |
Improvements to Property | Deduct costs of significant upgrades from gain; maintenance costs not deductible. | Retain receipts for all improvements; document costs clearly. |
Transfer to Business | Triggers immediate CGT at market value; gain calculated from probate value. | Consider keeping property in personal name to defer CGT. |
Table 2: Special Scenarios for CGT on Inherited Property (2025/26)
What Happens If You Share the Inheritance?
None of us likes family disputes, but sharing an inherited house with siblings or others can complicate CGT. If you co-own the property, each beneficiary gets their own AEA (£3,000) and pays CGT on their share of the gain. For example, in 2024, Eluned and her brother Iwan inherit a house in Glasgow worth £400,000 (50% each). They sell it in 2025 for £440,000, making a £40,000 gain. After £5,000 in costs, the net gain is £35,000, or £17,500 each. They each apply their £3,000 AEA, leaving £14,500 taxable per person. If Eluned is a basic rate taxpayer and Iwan is a higher rate taxpayer, they’ll pay 18% and 24% respectively on their shares. To avoid disputes, agree on a valuation method (e.g., professional appraisal) and document everything for HMRC.
Step-by-Step Guide: Reporting CGT on an Inherited House Sale
Now, let’s make this practical. If you sell an inherited house, you must report and pay CGT to HMRC. Here’s how:
Gather Documents: Collect the probate valuation, sale contract, and receipts for costs (e.g., estate agent, solicitor, improvements).
Calculate the Gain: Subtract the probate value and allowable costs from the sale price, then deduct your AEA.
Determine Your Tax Rate: Add the taxable gain to your income to see if you’re in the basic (18%) or higher (24%) rate band.
Report to HMRC: Within 60 days of completion, use HMRC’s online service (www.gov.uk/capital-gains-tax/report-and-pay-capital-gains-tax) to report the sale. You’ll need a Government Gateway account.
Pay the Tax: Pay any CGT due by 31 January following the tax year of the sale (e.g., 31 January 2027 for a 2025/26 sale).
Keep Records: Store all documents for at least 4 years in case HMRC audits you.
For complex cases (e.g., trusts or non-residency), hire a CGT advisor to avoid errors. Business owners should integrate this into their broader tax planning to optimize reliefs.
Key Takeaways for Managing CGT on an Inherited House
What Are the Most Important Points to Remember?
Now, let’s wrap things up with a clear, concise summary of the critical points you need to know about Capital Gains Tax (CGT) when inheriting a house from your parents in the UK. These are the essentials to keep in mind whether you’re a taxpayer or a business owner planning your next steps. Each point is distilled into a single sentence for quick reference, ensuring you can grasp the key rules and strategies without wading through details again.
Inheriting a house doesn’t trigger CGT, but selling it later may, with the gain calculated from the probate value at the time of your parents’ death.
The 2025/26 Annual Exempt Amount for CGT is £3,000 per person, which you can use to reduce your taxable gain on the sale of an inherited house.
CGT rates for residential property in 2025/26 are 18% for basic rate taxpayers and 24% for higher or additional rate taxpayers, based on your income plus the gain.
Private Residence Relief can exempt all or part of your gain if you live in the inherited house as your main residence, but renting it out reduces this relief.
Allowable costs like estate agent fees, solicitor fees, and significant improvements (e.g., a new extension) can be deducted from your gain to lower your CGT bill.
If you rent out the inherited house, the rental period is taxable unless you lived there first, and you must report the sale to HMRC within 60 days of completion.
Properties held in trusts have their own CGT rules, with the trust’s AEA applied on sales, and transfers to beneficiaries using the probate value as the base cost.
Non-residents selling an inherited UK house are subject to CGT at the same rates, must report within 60 days, and can’t claim PRR unless it was their main home.
Business owners transferring an inherited house to a company may trigger immediate CGT, so keeping it in your personal name could defer the tax.
Sharing an inherited house splits the gain among co-owners, with each using their own £3,000 AEA and paying CGT based on their tax band.
CGT Quick Reference Guide for Inherited Property (2025/26)
This guide summarises the key CGT rules for selling an inherited house in the UK, designed for quick reference.
No CGT on Inheritance: Tax applies only on sale, using probate value as base cost.
Annual Exempt Amount: £3,000 per person (£6,000 for couples).
CGT Rates: 18% (basic rate, income up to £50,270); 24% (higher rate, over £50,270).
Private Residence Relief (PRR): Exempts gain if house is your main home; reduced if rented out.
Allowable Costs: Deduct estate agent fees, solicitor fees, and improvements (not maintenance).
Reporting Deadline: Report sale to HMRC within 60 days via HMRC CGT Service.
Payment Deadline: Pay CGT by 31 January following the tax year (e.g., 31 January 2027 for 2025/26).
Trusts: Trust pays CGT on sale; transfer to beneficiary uses probate value.
Non-Residents: Pay CGT on UK property sales; report within 60 days; check double taxation treaties.
Business Owners: Transfer to company triggers CGT; consider personal ownership to defer tax.
Example Calculation:
Probate Value: £300,000
Sale Price: £340,000
Costs: £7,000 (fees)
Gain: £340,000 - £300,000 - £7,000 = £33,000
AEA: £33,000 - £3,000 = £30,000 taxable
Tax (basic rate): £30,000 at 18% = £5,400
Tip: Keep all documents (probate, receipts) for 4 years; consult a tax advisor for trusts or complex cases.
FAQs
Q1: Is CGT payable if the inherited house is gifted to someone else instead of sold?
A1: Gifting an inherited house is treated as a disposal at market value, so CGT may apply on the gain from the probate value to the current market value, minus the Annual Exempt Amount and allowable costs.
Q2: Can losses from selling an inherited house be used to offset other gains?
A2: If the sale of an inherited house results in a loss, it can be offset against other capital gains in the same tax year or carried forward to future years.
Q3: Does CGT apply if the inherited house is transferred to a spouse or civil partner?
A3: Transferring an inherited house to a spouse or civil partner is exempt from CGT, provided they are living together, and the recipient takes on the original probate value as their base cost.
Q4: How does CGT work if the inherited house is sold below its probate value?
A4: Selling below the probate value creates a capital loss, which can be used to reduce CGT on other gains, but no tax is due if there’s no gain.
Q5: Is CGT payable if the inherited house is used as a holiday home?
A5: If the inherited house is used as a holiday home and later sold, CGT applies on the gain from the probate value, as Private Residence Relief is unavailable unless it becomes the main residence.
Q6: Can CGT be deferred if the proceeds from selling an inherited house are reinvested?
A6: There’s no general provision to defer CGT by reinvesting proceeds from an inherited house sale, unlike some business asset disposals, so tax is due on the gain.
Q7: Does CGT apply if the inherited house is demolished and the land is sold?
A7: Selling the land after demolishing the inherited house triggers CGT on the gain from the probate value of the entire property (house and land) to the sale price of the land.
Q8: How is CGT handled if the inherited house is part of a larger estate?
A8: The house’s probate value is determined separately within the estate, and CGT applies only on its gain when sold, independent of other estate assets.
Q9: Can CGT be avoided by living in the inherited house temporarily?
A9: Temporarily living in the inherited house may qualify for partial Private Residence Relief, reducing CGT, but it must be genuinely used as the main residence.
Q10: Is CGT due if the inherited house is sold by a minor beneficiary?
A10: Minors are subject to CGT on the sale of an inherited house, but their Annual Exempt Amount applies, and a parent or guardian reports the tax.
Q11: How does CGT apply if the inherited house is sold in a divorce settlement?
A11: Selling an inherited house as part of a divorce settlement triggers CGT on the gain, unless transferred to a spouse before the divorce is finalized, which is tax-exempt.
Q12: Can CGT be reduced by claiming expenses for managing the inherited house?
A12: Only costs directly related to acquiring, improving, or disposing of the house (e.g., legal fees) are deductible; general management expenses like utilities are not.
Q13: Is CGT payable if the inherited house is converted into a business premises?
A13: Converting the house into a business premises doesn’t trigger CGT, but selling it later or transferring it to a business may incur tax on the gain from the probate value.
Q14: How does CGT work if the inherited house is sold to pay inheritance tax?
A14: Selling the inherited house to pay inheritance tax still triggers CGT on the gain from the probate value to the sale price, with no special exemption.
Q15: Can CGT be affected by changes in the probate value after inheritance?
A15: If the probate value is later adjusted (e.g., due to an error), the revised value becomes the base cost for CGT calculations, provided HMRC accepts the change.
Q16: Is CGT due if the inherited house is sold and the proceeds are donated to charity?
A16: Donating the proceeds after selling the house doesn’t exempt the gain from CGT, but gifting the house directly to a charity before sale can avoid CGT.
Q17: How is CGT calculated if the inherited house was owned by parents living abroad?
A17: The probate value at the time of death is still the base cost for CGT, regardless of the parents’ residency, and UK CGT applies on sale if the property is in the UK.
Q18: Can CGT be split if the inherited house is sold by multiple beneficiaries?
A18: Each beneficiary pays CGT on their share of the gain, using their own Annual Exempt Amount and tax band, based on their portion of the sale proceeds.
Q19: Does CGT apply if the inherited house is repossessed by a lender?
A19: If the inherited house is repossessed and sold by a lender, CGT may apply on any gain from the probate value to the sale price, treated as a disposal.
Q20: How does CGT work if the inherited house is sold after being subdivided?
A20: Subdividing the house (e.g., into flats) before sale doesn’t trigger CGT, but each portion’s gain is calculated from its share of the probate value when sold.
About the Author
Mr. Maz Zaheer, FCA, AFA, MAAT, MBA, is the CEO and Chief Accountant of My Tax Accountant and Total Tax Accountants—two of the UK’s leading tax advisory firms. With over 14 years of hands-on experience in UK taxation, Maz is a seasoned expert in advising individuals, SMEs, and corporations on complex tax matters. A Fellow Chartered Accountant and a prolific tax writer, he is widely respected for simplifying intricate tax concepts through his popular articles. His professional insights empower UK taxpayers to navigate their financial obligations with clarity and confidence.
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