Property to renovate: Inherited Properties
When looking at investment opportunities, inheritance is one that crops up for most people at one point or another. Whilst you can move into your inherited property or sell it, you could also rent it out for a profit.
But what tax do you have to pay when you inherit a property? What are the different ways you can inherit property? And how can we help?
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What is an inherited property?
An inherited property is a home that you acquire through the laws of descent and distribution. It is a term that is used to describe property that a person may acquire through a will. If you inherit a property it means that you have required it from a recently deceased family member or acquaintance.
What are the different ways to inherit a property?
There are three main ways that you can inherit a property:
- If the deceased owned the property outright, then the terms of the will will state who inherits the property
- If the deceased was a tenant in common, then their share is decided by the terms of their will
- If the deceased owner was held under ‘joint tenancy’, the surviving owner inherits the property automatically
In the event that there is no will, exactly who will inherit the property is dependent on the laws of intestacy (unless it is a joint tenancy).
What happens when you inherit a house UK?
When it comes to inheriting a home, one of the first questions you will have is what happens when you inherit a house UK? Below, we take a look at the steps involved when inheriting a property:
1. The will
The first step will be establishing your legal relationship with the inherited home. Was there a will left? Have you been named as a beneficiary? Are you an executor? If the deceased did not leave a will, then the next of kin will be able to prove that they have the legal right to deal with the estate. They can do this by applying for a ‘grant of administration’. If there is no will, the law will decide who inherits what.
2. Probate
The next step will be to go through probate. Probate is the legal process during which the executors of the will sort out the deceased affairs. This will mean that any assets will be gathered and evaluated, unpaid bills and taxes will be sorted and what is left in the will will be distributed. The probate process can be lengthy so don’t expect your property straight away.
3. Mortgage
Until probate has been completed, the property will not technically be yours. During this period there is not much you will be able to do, however it is worth checking the property to see if it has a mortgage. If this is the case, then you should get in touch with the mortgage lender to help explain the situation. The majority of mortgage lenders will have a period of grace where the mortgage payments are suspended until the estate has been sorted out. After the property legally becomes yours, the payments will restart.
4. Transfer ownership of the property
Ownership of the property will be transferred to you once probate has been completed and the will has been administered. After you become the owner of the property you can register it at the Land Registry. Unless the property has been sold or is mortgaged you will not have to do this, however, it gives you the best proof of ownership. It is important to talk with your solicitor in order to fully understand the process.
What happens when you inherit a property with a mortgage?
An aspect of inheriting a property is the mortgage that it brings along with it. If the deceased has life insurance, this can potentially be used to help clear the mortgage.
If the deceased does not have a life insurance policy that covers their mortgage, then you will need to find out what the mortgage lender will be expecting from you. You should carefully check the terms of your mortgage for any details regarding what happens in place of the death of the mortgage holder. Typically any payments will be frozen until probate has been sorted, but the interest may continue during the period.
Should the deceased have owned cash and other assets, then the mortgage will typically be viewed as a debt that will need to be repaid before the property is passed on.
The property will become yours after the executors of the will have settled debts and taxes. Should the property still have a mortgage on it then you should get in touch with the lender about getting the mortgage transferred into your name. If this is the case, it opens you up to issues, such as passing affordability tests for a new mortgage if you already have a mortgage on your current home.
You could also sell the property in order to pay off the mortgage if you have concerns about taking on a new home.
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Inheriting a share of the house
If you have inherited a property alongside other people, then you will all own equal shares of it, unless stated otherwise. From there, you must all decide the best course of action for dividing up the asset. There are two types of joint ownership:
Joint Tenants
If you are joint tenants then everyone will have equal rights to a property, which is then split equally between all of the beneficiaries. Should one of the beneficiaries die, then the property will remain in the hands of the others. The last beneficiary with the rights will pass the property on to whomever they choose.
Tenants in common
If you are tenants in common, then each person will have a share of the property. However, unlike with joint tenants, the share does not have to be equal. There is also more freedom with where the property can end up, as the beneficiaries can pass on their share to someone else.
What Alternatives To HMO's Are There?
Residential Buy To Lets
These tend to be normal residential houses, 2 to 3 bedrooms terrace, semi-detached, detached or flats. They are houses that are suitable for the average renter and are sometimes known as vanilla buy to let properties.
A House of Multiple Occupancy (HMO) is a rented property occupied by at least three people who are not from one household or five or more people, forming two or more households.
This type of Buy To Let is a freehold block which offers multiple, separate or independent residential units. This can be a variety of different types of property such as blocks of flats or houses converted into flats.
This is very similar to HMO’s and even are often referred to as non-licensable HMO’s. They have many characteristics of a typical HMO but don’t require the licence, but they may still require planning permission from your local authority.
as the name describes, this is a commercial premises and it is when you let the property out to one or more businesses. It’s often referred to as Commercial Landlord Mortgage, Business Buy To Let Mortage or Commercial Investment Mortage.
Do you pay inheritance tax on inherited property?
If you have inherited a property in a will, then there are several forms of tax that you will be subject to, inheritance tax being one of them. Below, we take a closer look at some of the taxes that you will be liable to pay when dealing with inherited properties:
In the event that the deceased estate (property, savings, shares, and other various assets) comes to a greater total of £325,000 then inheritance tax will be due, except in certain circumstances.
If the property that you have inherited is a holiday let or a buy-to-let then you will be required to pay income tax when you start receiving income from the rent.
If you decide to sell your inherited property, then you may have to pay capital gains tax.
Inheritance tax on inherited properties
Exactly how much inheritance tax you will have to pay will depend upon the total of the deceased estate and the value of the inherited property. As a rule of thumb, if the total estate is worth more than £325,000 then 40% of everything over this total will need to be handed over.
There is an exception, however, for direct descendants to have main residences passed onto them. So if the property you are inheriting is your parents or grandparents, then the tax bill will be reduced.
The main residence nil-rate band is £175,000 for the tax year 2023/24. This allowance is then added onto the main inheritance tax nil-rate band of £325,000. it depends upon the value of the property, you have the potential to inherit property worth up to £500,000 without needing to pay inheritance tax.
As an inheritance tax allowance can be passed between spouses and civil partners, there is no inheritance tax to pay in the tragic event of the passing of a spouse or civil partner. This means, if one of your grandparents, or parents, has already passed, and they did not use their inheritance tax allowances at the time, then you have the potential to inherit an even more valuable property.
An example of this would be if both parents have died, and the first to die passed on all of their assets to the surviving spouse, then that spouse could pass on a property and estate worth up to £1,000,000 to their children or grandchildren tax-free.
If you have to pay tax it will be due within 6 months of the deceased’s death. Typically you can expect this to be settled by the executors of the will. Thankfully, it is possible to pay the inheritance tax in annual instalments to avoid having to sell an inherited property in order to pay the tax.
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Income tax on inherited properties
Income tax is a tax that you will not be required to pay unless you are earning an income. If you were to rent the property out, then you will need to declare this on a self-assessed tax return. The income tax that you earn will be due at your marginal rate, and this will depend upon your total income for the year.
Capital gains tax on inherited properties
If you decide to sell your inherited property, then chances are you will find yourself having to pay capital gains tax. Should the property have increased in value since you inherited it, then capital gains tax may be due on the rise in value.
If you are a basic-rate taxpayer then you can expect to pay 18% on gains from a residential property. If you pay a higher or an additional band of tax then the rate you pay will rise to 28%. Everyone gets an annual capital gains tax allowance and in the 2023/24 tax year, this is £6,000 per person but is soon to be cut to £3,000 per person for the 2024/25 tax year.
Should the profit on your inherited property come to less than £6,000 then you won’t have to pay capital gains tax, unless you have used up your annual allowance.
If you make the inherited property your main residence and move into it, then capital gains tax will not be due when you sell it.
Pros and Cons of renting out the property you inherited
One option for your inherited property is to rent it out. However, when deciding to rent the property you will have a lot to consider, as with any investment decision, there are pros and cons to be thought about. Below, we take a quick look at the pros and cons involved with renting out an inherited house.
Pros
- You will receive a steady income from your rental payments
- If you have inherited the property alongside other people, you will be able to split the monthly payments between you all
- You will have no inheritance tax to pay until you decide to sell
- If the market is going through a difficult period, there will be no rush to sell, and you will still be receiving monthly payments.
Cons
- The property may be in need of renovation and can eat away at your budget
- If you do not live locally, you may have to face the extra costs of hiring a letting agent to help manage the property
- Any profit you make will be subject to tax and will be treated as income
Inheriting a buy-to-let property
If you inherit a buy-to-let property, you will need to decide what to do with them. If you are planning to move into the property yourself or sell it, you will need to check the terms of your rental contract.
If you decide to take over the tenancy and continue renting out your property, then you will need to get a new contract drawn up, naming you as the new landlord.
If there is a buy-to-let mortgage, then you have two options, you can either get the mortgage moved into your name or remortgage your buy-to-let to a new deal. Regardless of which of these options you choose, you will have to pass the lender’s affordability tests.
Why Invest With Us
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We go the extra mile to tailor our service to you and we pride ourselves on our ability to source a wide variety of different investment opportunities. When you purchase your investment opportunity through us, we take care of everything, from solicitors to surveys. It’s just one of the ways that we make investment work for you.
Kickstart your investment journey today by filling in one of our free online forms, or give us a ring!
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Our Locations
You might be wondering where we are able to offer these fantastic Buy To Let opportunities with great yields, and the answer is pretty much anywhere in England and Wales. We’ve detailed below some of the main areas that we regularly buy properties in, just to give you an idea.
- Bath
- Birmingham
- Bradford
- Brighton
- Bristol
- Cambridge
- Canterbury
- Carlisle
- Cardiff
- Chelmsford
- Chester
- Chichester
- Coventry
- Derby
- Durham
- Ely
- Exeter
- Gloucester
- Hereford
- Kingston upon Hull
- Lancaster
- Leeds
- Leicester
- Lichfield
- Lincoln
- Liverpool
- London
- Manchester
- Newcastle
- Norwich
- Nottingham
- Oxford
- Peterborough
- Plymouth
- Portsmouth
- Preston
- Ripon
- Salford
- Salisbury
- Sheffield
- Southampton
- St Albans
- Stoke
- Sunderland
- Swansea
- Truro
- Wakefield
- Wells
- Westminster
- Winchester
- Wolverhampton
- Worcester
- York
Buy To Let Investment Examples
When we say that we can source properties that offer a high yield, you don’t just have to take our word for it. Below you will find some of the properties we’ve recently sold to our investor database and their example yields:
- Area: Gwent
- Market Value: £70,000
- Discount (%): 12.5%
- Net Purchase Price: £61,250
- Potential Rental: £500 p/m
- Potential Yield: 10%
- Area: Leeds
- Market Value: £80,000
- Discount (%): 12.5%
- Net Purchase Price: £70,000
- Potential Rental: £550 p/m
- Potential Yield: 9.5%
- Area: Crewe
- Market Value: £100,000
- Discount (%): 15%
- Net Purchase Price: £85,000
- Tenanted At: £575 p/m
- Yield: 8.1%
- Area: North London
- Market Value: £290,000
- Discount (%): 15%
- Net Purchase Price: £246,500
- Potential Rental: £1400 p/m
- Potential Yield: 6.8%