Inheriting a house? What happens next (including tax)

Inheriting a house is one of those life events that can inspire mixed feelings. There’s gratitude, there’s grief, and – often – a growing sense that someone is going to hand you a bill.

That said, the picture is more nuanced than many people expect. But with the right information, you’ll be in a much stronger position.

Below is a non-nonsense guide to what actually happens when you inherit a house in England and Wales. We also cover the main tax points you need to know.

Who pays Inheritance Tax on inheriting a house – and when?

A common misconception is that the person who inherits a property pays Inheritance Tax. In most cases, that’s not how it works. Inheritance Tax (IHT) is charged on the estate of the person who has died – and it’s normally paid by the personal representative (executor or administrator) before assets are distributed, not by the beneficiaries afterwards.

So if you’ve inherited a house, the IHT question has usually been dealt with (or not dealt with) before the property reaches you. What you do need to think about, however, is what happens next – because there are other tax implications depending on what you decide to do with it.

When does Inheritance Tax actually apply to a house?

Not every estate pays IHT. The standard nil-rate band – the amount an estate can be worth before IHT kicks in – is currently £325,000. On top of that, there is an additional residence nil-rate band (RNRB) of up to £175,000. This applies when a home is left to direct descendants such as children or grandchildren. Importantly, a buy-to-let property that the deceased never lived in would not normally qualify for the RNRB. However, there are special ‘downsizing’ rules that can preserve the relief in some cases where a qualifying home was sold, given away, or replaced with a less valuable one.

In practical terms, this means that a single person leaving their home to a child can potentially pass on up to £500,000 before any IHT is due. For married couples and civil partners, unused nil-rate band and residence nil-rate band allowances can usually be transferred to the surviving spouse or civil partner, giving a potential combined threshold of up to £1 million.

However, there is an important catch. The RNRB begins to taper away on estates worth more than £2 million. Given the rise in UK property values over recent years, this threshold is not as remote as it might once have seemed. If you’re inheriting a house as part of a larger estate, it’s worth checking whether a taper has applied and whether the resulting IHT has been correctly calculated.

What are your options once you’ve inherited a house?

You have three broad choices when inheriting a property: move into it, sell it, or keep it as an investment. Each has different tax implications.

1. Keep it as your main home

If you move into the inherited property and it genuinely becomes your main residence, you may be entitled to Private Residence Relief when you later sell. However, if you already own another home, the position is more complicated. You can only have one main residence at a time for CGT purposes, and any relief will depend on the facts and, in some cases, whether a valid nomination is made to HMRC within two years. Simply spending some time in the inherited property does not automatically exempt the whole gain.

2. Sell it

When you inherit a property and then sell it, CGT may apply – but only on any increase in value between the date of death and the date of sale. The property is revalued (or ‘rebased’) at its market value on the date the person died, so you’re not taxed on a lifetime’s worth of growth.

If you sell the property promptly and values haven’t moved much, your CGT exposure may be minimal or nil. If the property appreciates significantly before you sell, the gain becomes more meaningful. CGT on residential property is currently charged at 18% for basic rate taxpayers and 24% for higher rate taxpayers. (This is applied after your annual CGT allowance, which is now just £3,000).

If you’ve inherited jointly with siblings or other beneficiaries, you’ll need to agree on when to sell –  the tax position may differ for each person depending on their overall income. It’s also worth knowing that if the executors sell the property before it is transferred to a beneficiary, any CGT can fall on the estate rather than you personally. And if CGT is due on any UK residential property disposal, it generally has to be reported to HMRC and paid within 60 days of completion – not at the end of the tax year.

3. Let it

Keeping an inherited property as a rental is an increasingly popular choice – and an understandable one. But it does come with ongoing tax obligations. Rental income is subject to Income Tax, and the way buy-to-let is taxed has changed significantly in recent years (mortgage interest is no longer deductible in the way it once was for individual landlords, for example).

You do not usually pay property transaction tax simply because you inherit a house – inheriting under a will or intestacy is generally exempt. The question of purchase tax normally arises only if you later buy another property while still owning the inherited one. In England this means Stamp Duty Land Tax (SDLT). In Wales, the equivalent is Land Transaction Tax (LTT). Even then, the position is not always straightforward – there is a specific exception where an inherited share is 50% or less and the new purchase takes place within three years of the inheritance. If you are in this situation, it is worth taking advice before assuming the higher rates will apply.

What to do first when inheriting a house

The practical to-do list when inheriting a house is longer than most people expect. A few key steps:

• Obtain probate (if required) before the property can be transferred or sold
• Update HM Land Registry records when the property is transferred to you or sold
• Get a professional valuation at the date of death – this ‘probate value’ is your CGT baseline if you later sell
• Check whether IHT has been correctly calculated on the estate – including whether all available reliefs were claimed
• Consider the insurance position – an empty or inherited property may need specific cover

Taking proper advice at this stage can save significant sums later. This is particularly so if the estate was complex or the will wasn’t as clear as it might have been.

A few practical points people often miss

Council tax on an empty inherited property

The council tax position differs between England and Wales. In England, an empty property left after death is generally exempt while probate is outstanding. A further six-month exemption may apply after probate is granted if the property remains empty and has not been sold or transferred. In Wales, the Class F exemption rules are currently more generous, and a property may remain exempt for longer. However, in both jurisdictions, empty-home premium rules can also become relevant, so it is worth checking the position with the local authority rather than assuming the same timetable applies everywhere.

Main residence nomination

If you genuinely end up with more than one residence – that is, you are actually living in or regularly occupying both properties – you can nominate which is treated as your main residence for CGT purposes. HMRC allows this nomination to be made within two years of the change in your combination of homes. Simply owning an inherited property you never live in does not trigger this rule. However, if you do split your time between two homes, missing the nomination window can have consequences. It is worth taking advice promptly if you find yourself in that position.

Loss on sale relief for executors

If the property is sold by the estate for less than the date-of-death valuation – for example, if the market has softened – HMRC says relief may be available to substitute the lower sale price for IHT purposes, provided the sale takes place within four years of the death. This can be a useful reclaim if IHT has already been paid on the higher value.

What inheriting a house might tell you about your own estate

There’s an odd effect that comes with inheriting property – it often makes people think about their own estate. If inheriting property has made you wealthier, it’s worth considering what that means for your own IHT position.

Many people are surprised to discover they are now in scope for IHT themselves. This is exactly when good advice makes a real difference. After all, the earlier you plan, the more options you may have.

Speak to THP about inheritance tax planning

Whether you’ve just inherited a property and want to understand your options, or you’re thinking about your own estate, our team can help. Ian Henman leads THP’s Legacy Planning team and specialises in straightforward, practical IHT advice.

Book a no-obligation call with Ian, or find out more about our inheritance tax planning service.