What to do when you inherit a property

Figuring out what to do when you inherit a property can feel confusing and, at times, stressful. However, in this article, we will outline the main steps involved.

When you inherit a property from your parents or other family members, there are a lot of things to sort through. Also, you need to answer questions such as:

What taxes, if any, are due (Capital Gains, Stamp Duty, and Inheritance Tax)?

Have you inherited the property on your own or with another sibling or person?

Does the inherited property still have a mortgage on it?

Should you sell or keep the inherited property?

What happens if you inherit a house?

Before you can benefit from the property, you must complete a range of legal issues first. These include:

Locating the Will

You need to establish your legal relationship if you inherit a property. If the person who died left a will, the will may name you as a beneficiary. This gives you legal rights to your share of the estate once the executor administers the estate. Also, if you are named as an executor, you are responsible for sorting out the estate of the person who has died.

However, if someone dies without leaving a will, they die intestate under the law. In this case, the next of kin apply for a "Grant of administration" to prove their legal right to handle the estate.

Furthermore, if there is no will, the law decides who inherits what.

Probate

Understanding what to do when you inherit a property starts with probate, the legal process where the executor(s) go through the deceased’s affairs.

The executors collect and evaluate the deceased's assets. This will include money, property, and other assets owned by the deceased at the time of death. Furthermore, they pay any outstanding bills and taxes. They then distribute the remainder of the estate as stipulated in the will.

The probate process often takes up to a year to complete. However, if you have inherited a property, you'll have time to decide what to do with it.

Mortgages

If you inherit a property, it does not technically belong to you until the court grants probate. As such, there is not much you can do with it until then. However, it is worth checking if the property has a mortgage on it.

Part of what to do when you inherit a property is ensuring you understand any mortgage obligations that may pass to you. If it does, you should contact the lender to explain the situation.

Most mortgages come with a grace period, meaning lenders usually let the estate pause repayments during probate.

Once the property legally belongs to you, you must take responsibility for any outstanding mortgage.

Transferring Ownership

Once the executor completes probate, they transfer the property’s ownership to you. Also, a key part of what to do when you inherit a property is registering your ownership with the Land Registry to secure your legal rights.

Although you only need to do this if the inherited property has a mortgage or you plan to sell it, registering ownership provides the best proof. Therefore, things are more clear-cut in the future.

What happens if you inherit a property with a mortgage?

In the UK, if you inherit a property with a mortgage, you become responsible for the mortgage repayments, even if you do not live there.

The deceased may have a Life Insurance Policy. You can use this to cover the cost of the outstanding mortgage.

If there isn't a Life Insurance Policy, or there is, but it does not cover the outstanding mortgage in full, you will, in general, have two options once the inherited property is legally yours.

1. Take out a new mortgage on the inherited property in your name

2. Sell the house and use the proceeds to pay off the outstanding mortgage.

What happens if you inherit a property with others?

If you inherit a property with other people, you all own equal shares (unless otherwise stated in the will). Deciding what to do when you inherit a property with others, whether to sell, rent, or keep it, requires agreement among all parties.

Under current law, there are two types of joint ownership.

Joint tenants

Joint tenants mean that everyone has equal rights to the property, and it is split equally between the beneficiaries.

When one person dies, the surviving owners retain the property.

The last person with rights can pass the property to their chosen beneficiary.

Tenants in common

Here, each person has a share of the property. However, the percentage does not have to be equal.

Also, the beneficiaries can pass their percentage to someone else, which gives more flexibility over where the property ultimately goes.

However, selling the property is sometimes the easiest option. When you sell the property, you can split the proceeds between the beneficiaries.

What to do if you keep an inherited property.

Once the inherited property is legally yours, if there is a mortgage on the property, you need to transfer it to your name or take out a new mortgage.

What to do if you decide to sell an inherited property

Firstly, it may be worth seeking advice from a local estate agent to determine the current market value of the property in its present condition. Also, they should be able to advise on renovations that may increase the value.

Once you put it up for sale, selling it works like selling any other property, although you may need to pay inheritance tax or capital gains tax on the proceeds.

What about Stamp Duty?

You must pay this tax when you purchase a property or piece of land. However, if someone leaves you the property in a will, you do not pay stamp duty. Instead, you may have to pay inheritance tax.

The situation does change, however, if there is an outstanding mortgage. If you decide to keep the property, and it has an outstanding mortgage, you may have to pay stamp duty on the remaining mortgage amount.

Do you pay capital gains tax on an inherited property?

If you sell an inherited property that is not your main residence, you may be required to pay capital gains tax.

The amount you pay will depend on your income and the amount of gain you make from the sale. HMRC adds the profit you make from the sale to your income. This determines which income tax band you fall into.

You then pay capital gains tax on any profit at the specific rate that applies to your tax band.

Do you pay inheritance tax on an inherited property?

The executor pays inheritance tax directly from the deceased's estate funds. As such, you do not have to pay it directly as the inheritor.

However, if you are a beneficiary, you can choose to use your savings or raise funds to pay any inheritance tax that is due. As such, you can avoid selling equity in a family home.

There are complicated rules on who must pay. As such, it is best to consult a financial advisor.

Examples:

1. If the estate is worth less than £325,000, there is no inheritance tax to pay. However, if the estate is worth more, then you only pay inheritance tax on the amount that is over £325,000.

2. If the estate is left to a spouse, civil partner, charity, or a community amateur sports club, there is no inheritance tax to pay.

3. The tax-free inheritance tax threshold could increase to £500,000. This applies if the deceased owned their home or a share in it. However, it only applies if the property is left to the children or grandchildren, including adopted, foster or stepchildren, and the estate is worth less than £2 million.

The standard rate of IHT is 40%. You must pay it based on the total value of the estate. Furthermore, the total value of the estate includes property, investments, and any other assets.

The executor must pay HMRC by the end of the sixth month after the person’s death.

Inheriting a property in a trust

A trust is a method of managing money or property for individuals who may not be capable or ready to do so.

If you inherit a property in a trust, you are the beneficiary. However, the trustee legally owns the property and must manage it as stated in the deceased's will.

What happens if I inherit a property that is abroad?

In this scenario, you must include all foreign assets, including property, in the total value of the estate and may be subject to UK inheritance tax. Knowing what to do when you inherit a property abroad includes checking both UK tax laws and the rules in the country where the property is located.

Also, there may be additional tax due in the country where the assets are located. However, there are double taxation treaties with many countries, thus allowing you to claim back any double payments.

Does inherited property have an impact on divorce settlements?

Typically, all assets are pooled and treated as joint ownership. Inherited assets are generally not excluded from this process; however, every case is unique, depending on personal circumstances.

How long will it take to receive the money from an inherited house that is sold?

You cannot sell the property until probate is completed unless your name is already on the deeds. Each case is different, but in general, it can take anywhere between eight weeks and a year.

As such, it is not uncommon to place the inherited property on the market before probate is completed. Subsequently, it could allow for a quick sale once probate is completed.

Get expert advice

Knowing what to do when you inherit a property is not always straightforward and can be a complex matter with many factors to consider.

Obtaining probate, mortgages, joint ownership, and tax liabilities are just a few of the numerous factors to manage. If you’re unsure what to do when you inherit a property, it’s always wise to seek professional legal and financial advice.

Regardless of the route you choose with the inherited property, seeking financial advice can help make the entire process smoother.

Let Regulated Advice match you with a financial advisor for expert advice.