Capital gains tax on an inherited property

[Kracken]

Hi, am posting this in legal too. Would really appreciate some advice on this, I have looked at the HMRC site but no wiser!

So, my husband inherited a house a couple of years ago. When he inherited it was valued for probate purposes at £600K. The house was a bit of a mess (it hadn't been decorated for about 30 years, the top floor had been shut up for about 10 years, no central heating, very dodgy electrics etc) and at that point we weren't in a position to borrow any money so we didn't do anything with it apart from clearing it out. We didn't really want to sell it at that point.

This year we were able to increase our mortgage on our home a bit to allow us to renovate the inherited house. Once it is renovated, based on recent sales of houses round here, it is likely to be worth about £900K (crazy London prices).

I understand that capital gains is paid on profit when you sell, i.e. how much a property has risen in value. But, my husband didn't pay for it he inherited it. Does this mean he would have to pay capital gains (28% I think) on £900K or would it be on £300K which is roughly how much I think the value will have increased by.

Thanks!

CGT will be due on the difference only. Not sure what exact date (ie death or probate) is taken for initial value but it is only the increase in value of inherited assets.

I should add that at that value, an hour with a tax advisor will probably be worth it.

Hi OP, I think a probabte valuation is done as at the date of death. This is nominally when your DH inherited the property.

If/when you sell it, Capital Gains Tax will be due on the 'capital gain' ie how much the property will have increased in value from when your husband inherited it (the estate of the person who left it to him will likely have paid the inheritance tax). The CGT will therefore be on the 300k increse in value.

However I agree with Just that a trip to the tax advisor is necessary becuase there are certain capital allowances you can use to make the tax bill less, like your annual exempt amount (about 10k ish). You can also deduct sums for capital improvements (not repairs). Your calculation could therefor look something like this:
Update electrics 5k, install central heating 20k, decorate entire property, 20k, new bathroom 5k, new kitchen 10k, professional advice 5k. Total spent 65k.
Gain 300k. Take away the 65k. Taxable gain 235k

Thanks so much for taking the time to reply, your help is much appreciated.

Just: we will see a tax advisor I think. You're right that it's worth doing, thanks.

Lady: that example is incredibly helpful, thank you

What you need is a red book probate valuation based on the date of death and carried out by a RICS surveyor (red book is the rule book the royal institute of chartered surveyors use) . Just a letter from an estate agent is not sufficient.

Yes there will be various allowances and deductible costs if you could move into the property for a while any profit will be tax free.

Costs,

I had one of these. I quibbled a lot about the house valuation for IHT; but then when it was sold had to pay the CGT on the difference between the IHT valuation and the sale price. It is possible to quibble over factors that have increased the value, such as rebuilding. If the sums are substantial you probably need to consult a solicitor and/or a surveyor. It makes a difference whether the sale is by executors or legatees.

Hello piglet john, if the sale is by the legatees the executors should have obtained a probate valuation and that is the figure the inland revenue will work to. If the sale is by the executors, again they should will already have a valuation based on the date of death.

Red book valuations are not cheap but very necessary to avoid the revenue stating an overinflated valuation figure.

The value would have been stated when probate was granted, you will not be able to change that now, so it will be the difference between the value then and now that you will be liable to pay cgt on, less your husbands allowance and expenses (renovn costs would come into this). Probate solicitor will have details of this. These days Hmrc will accept average of 3 estate agents valuations, the solicitor and trustees may have used this route.

Tbh, getting advice on this is prob best sought from an acct, not mumsnet.

Definitely see an accountant. There's an easy way of saving about £3k of tax that I can see (provided you have no capital gains) - put the property in both your names. There may be other ways of reducing the CGT depending on the circumstances.

HMRC may challenge the value if estate agents valuations are used. if the estate is under the inheritance tax threshold an estate agents letter is fine but not relevant to OP.

Estimates can be used when applying for probate and the inland revenue will adjust actual figures at a later date.

A red book valuation for probate purposes is required. In some circumstances it would enable you to claim an inheritance tax refund. Not relevant in this case bit where a property is sold at a loss and where it is an arms length transaction to an unconnected party.

Yes to property being in two names, thus x 2 capital gains tax allowances of £10,900 each.

I would think you could obtain a retrospective probate valuation , it sounds like the works have not yet commenced. If you can, do so or the revenue will have you over a barrel.

and as threads like this always show, go to a professional …

Her honesty- you are quite right professional advice is invaluable but expensive, and mumsnet can save you money. My DH is a chartered accountant and as executor he recently dealt with a similar estate. Solicitors quoted £35k and £11k plus extras to deal with the estate we decided to do the work ourselves, did all the research and then made an appointment with a probate solicitor and asked her to check our work, she charged us for about half an hour plus time to read the paperwork, i think The fee was £600, she said she felt like a taxi driver on the clock!

We saved somewhere between £10,000 and £34,000.

The solicitor said she AlwaYS instructs a probate valuation. Indeed the property we dealt with was sold for £2,500 less then the probate valuation and we duly received a refund cheque from the inland revenue for £2,500. The property was originally estimated as £20k more on the probate forms but the revenue adjusted all the estimates as soon as the actual figures were known.

The revenue do not actually challenge the figures themselves they use the DVO, district values office, without a probate valuation i believe it is impossible to challenge the DVO.