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Inheriting a property after a relative or loved one has passed away can bring a mixture of emotions. Understanding how to prepare for the process will help make inheriting a house seem less daunting. It’s important to note that you are likely to be faced with deciding what to do with the property: you won’t have to make an immediate decision in most cases.
Compare My Move work with industry experts to bring you the most informative and helpful advice for buying and selling property. From inheritance tax to who makes the decisions on inherited property, this guide will cover everything you need to know when inheriting a house.
If a loved one has passed away and made a will, it will probably involve the appointment of an executor - usually a family member or solicitor - to administer the deceased's estate, which will consist of their financial assets and property.
If there isn't a will, you’ll need to check intestacy rules (by consulting a solicitor) to see who can administer the estate - this person is called an administrator.
The executor or administrator, generically called a personal representative, will need to obtain a grant of representation to administer the estate and ultimately sell the property included.
After the grant to proceed with enacting a will has been issued by the probate registry - typically taking four to 12 weeks - the personal representative will collect the deceased's assets and pay any debt, bills and taxes.
The estate will then be distributed, which could include transferring the sale proceeds of the property to you or registering the property in your name if you are the beneficiary. The whole process of administering an estate usually takes around 9 to 12 months but it could take longer than this if the house is being sold in a ‘slow’ housing market.
A licensed conveyancer or conveyancing solicitor will need to be hired to take care of the legal side of selling or transferring the house to you.and getting help from a professional will make the process less stressful.
There is rarely a strict or short deadline for a property to be sold or put into the name of someone else, but the personal representative will need to pay inheritance tax on the value of the deceased's estate, including the value of the property, within 6 months of the death.
Many mortgage lenders are sympathetic so often acknowledge that payments may wait until after the estate is sorted out. This is called a ‘period of grace’ and will give you the chance to make a decision on the inherited property. But remember, you must tell the mortgage lender of the death to allow this to happen.
The personal representative will be responsible for making decisions relating to the estate and property. They will also be responsible for paying any debt, taxes and distributing items or the whole estate including the property according to the intestacy rule or as detailed in the will.
If you inherit a property that still has a mortgage, you will be responsible for keeping up with the mortgage payments (unless directed otherwise in the deceased's will). If the property was covered under a life insurance policy, then the cost of the mortgage payments will be covered.
If the property doesn’t have a life insurance policy and you can’t cover the mortgage repayments, you can either sell the home, take out a new mortgage or let out the property. Some of the options to help you cover the mortgage costs:
1. Selling The Property - By selling your inherited property you will be able to pay off the remainder of the mortgage. A study from Market Financial Solutions (MFS) shows that 67% of people who inherit a property choose not to live there themselves, with a further 55% selling the property to re-invest the money.
2. Take Out A New Mortgage - If you plan to keep the house but can’t afford the mortgage repayments, it could be worth taking out a new mortgage in your name. Once you’ve worked out how much mortgage you can afford, you can try and get a better mortgage deal for the property. The mortgage usually won’t start until after the property is officially yours.
3. Let Out The Property - Many people who have inherited property choose to let out the property to cover the mortgage repayments. You will need to apply for a buy-to-let mortgage if you plan to let out the house.
When a person passes away, their estate may be subject to inheritance tax. The personal representative of the estate is responsible for ensuring the payment of
any inheritance tax on the value of a deceased's estate from the assets in the estate, such as the house. Inheritance tax is charged at 40% of the value of an estate above any allowances or reliefs that are available.
All individuals have an inheritance tax allowance of £325,000. Further, a deceased individual can inherit their late spouse's inheritance tax allowance in certain circumstances and so it is possible for a deceased individual to have an inheritance allowance of £650,000 before any tax is charged.
There is an additional allowance available to deceased individual's where their property passes to direct descendants - typically their offspring - called the residence nil rate band. This allowance is £175,000 for the 2020/21 tax year and can also be inherited from a late spouse. In total, a person could have an inheritance tax allowance of £1million before any inheritance tax is charged.
HMRC reports a 3% increase in inheritance tax receipts from 2018-2019, compared to the previous year. The total received in inheritance tax in 2019 totalled at £5.4 billion, with the figure continuously rising since 2009.
“An estate is worth £1million including a property worth £500,000 which is left to children. The deceased only has their inheritance tax allowance and the residence nil rate band available. Inheritance tax will therefore be charged on £500,000. This means the personal representative will pay £200,000 inheritance tax.”
If the personal representatives transfer the house to you rather than selling it, you may be required to pay capital gains tax (CGT) when it comes to selling your inherited property if it’s a second home and if the property has since increased in value. It’s worth noting you won’t pay CGT on the property’s value increase throughout the deceased owner’s lifetime, but only on any value increase since the deceased passed away.
The current CGT tax-free allowance stands at £12,000. From April 6th 2020, you must pay CGT after 30 days of selling the property. For more detailed information on what to expect with CGT on a second home, read our informative guide on capital gains tax when selling a property.
Further, if the property is transferred into your name, you will have to pay income tax on any profit you make from your inherited property. Many people typically let out an inherited property to cover the costs of debt and mortgage repayments, so remember to factor in the cost of income tax too.
You’ll have to report your income to HMRC by 5th October on a paper return or 31st January via an online return following the end of the tax year. It may be wise to involve an accountant with experience of handling estates and inheritance tax.
You should not have to pay stamp duty when you inherit a property. However, if you share the home with other beneficiaries and one of you decides to buy the others out, then stamp duty could be due during the transaction. It would be wise to speak to your solicitor or financial advisor for further information, especially if you are the person planning to buy out the other beneficiaries.
Inheriting a home with other people often makes the process slightly more complicated as you become joint owners. You and your siblings will all have to agree on any and all decisions made, together. One choice you must all discuss is selling the property. This is often the simplest solution as, once it’s sold, you can then all split the proceeds.
If this is not agreed upon, you could discuss renting out the property. If this is what you choose, you will all have to come to a decision on who will manage the home: one of you or a lettings company? Whilst you go through your options, you will also have to determine how the costs and income will be split between you all.
Another option to consider is whether one of you would like to live in the property you’ve inherited. If someone prefers this option, you will all have to decide whether they should buy out the others or pay rent. No matter what decision you come to, it must be made together.
You may need to get certain home insurance when you inherit a property to ensure it’s fully protected. The type of home insurance you’ll need will depend on what you plan to do with the property. Some home insurances you might need for an inherited property include:
Second Home Insurance - If you choose to keep your inherited property whilst still living in your original home, you will need second home insurance. If you’re selling your current home and moving into the inherited property, standard home insurance will cover you.
Landlord Insurance - If you decide to let out your inherited property, you will need to take out landlord insurance. Many mortgage lenders will require you to have landlord insurance when you take out a buy-to-let mortgage.
Unoccupied Insurance - If you need time to decide what to do with your inherited property, it could be worth getting unoccupied insurance. You will need it if the property is going got be unoccupied for over 30 days.
Many people who inherit property choose to sell the house. This is because it will pay for any expenses and liabilities of the deceased's estate. The steps to sell a property in a deceased estate are:
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