Losing a loved one is always an emotional time. Sometimes those left behind are bequeathed property in a will, and they are left wondering what to do when inheriting a house; should they keep it or sell it? Inheriting property involves a process, and by being aware of what’s involved, it can help it go much more smoothly. The first important thing to know is that you don’t have to rush the decision, especially at a time when emotions are high.

When is it time to decide what to do?

It is often the case that there is no immediate time limit placed on the inheritor to transfer the property to a new owner or sell the property. However, the personal representative is required to pay the due inheritance tax within 6 months based on the value of the deceased estate, which includes the value of the property.

Losing a loved one is a sad and painful time, and so mortgage lenders, once you have informed them of the death, are usually accommodating in waiting for the estate to be settled, giving a “period of grace” to decide what to do with the property.

The decision about what to do with the property and estate is made by the personal representative. They are also to make sure that any tax due or any debt that is owed by the deceased’s estate is paid, as well as distribute what was left according to the will or intestacy rule.

The 6 steps involved with inheriting a house

Step one: the appointment of an executor of the will needs to be done to administer the deceased’s estate. This is typically a close family member of the solicitor.

Step two: where there is no will, the process is guided by intestacy rules and a solicitor will be required for this. This will help decide who will be the administrator of the estate.

Step three: the “personal representative” (executor or administrator) is required to obtain a grant of representation from the probate registry to administer the estate. This can take about 4–12 weeks to arrange.

Step four: The personal representative will collect and list the deceased assets, and any outstanding money owed by the estate, like debt, taxes, etc., will need to be paid.

Step five: The personal representative will then distribute the estate to those identified as the beneficiaries. This may include either transferring the property and registering it in the beneficiary’s name, or if the property has been sold, transferring the proceeds of the sale.

Step six: The administering of the estate is completed and can often take about nine months to a year, depending on the state of the housing market if the property is being sold. For selling or transferring of the property to the beneficiary, a solicitor will be needed to make sure that all the legal obligations are met.

What if the house isn’t wholly owned but has a mortgage?

Beneficiaries of property that comes with a mortgage will be responsible for keeping on top of the monthly mortgage payments, unless directed otherwise by the will. In some instances, the property may be covered by life insurance, so the repayments will be covered by the policy. But where there is no insurance cover in place and the beneficiary is unable to meet the payments, then they could do several things:

• Sell the property
• Take out a new mortgage
• Rent the property out to cover the payments
• Sell the property

Once the property has been sold, the money owed on the mortgage can be paid off. Statistics show that nearly 70% of beneficiaries of inherited property decide not to live in it, and over half will sell it to reinvest in other investment opportunities.

Some beneficiaries of property will want to keep the house but might not be able to afford to keep up with the payments. One possibility is to take out a new mortgage in their own name, which allows for the possibility of getting a better mortgage deal than what is currently attached to the property. Note that mortgage payments won’t be required to be paid until the property has been officially transferred.

If the beneficiary of the property decides to rent it out to cover the monthly repayments, then they will have to make sure that they apply for a buy-to-let mortgage. A brief word of caution, however, here. This will mean that the beneficiary has become a landlord and will therefore need to be aware of all the legal responsibilities that that entails and make sure the property is up to letting standards.

The four steps required for selling an inherited property

Step one: It needs to be established if there is a will in place to determine who can administer the estate of the deceased. If not, then the intestacy rules need to be consulted to determine who will have the authority to administer it.

Step two: The designated personal representative is required to pay the inheritance tax due on the estate. Next, they will need to apply for a legal document called a “grant of representation” to sell the property. A solicitor is recommended to make sure this goes without a hiccup due to the complex nature of the sale.

Step three: The beneficiary of the house will have to decide what to do with it, whether it will be sold or have the title transferred to the new owner. The beneficiary will receive the proceeds of the sale if the property is sold, or if the property is transferred, then the beneficiary’s name will be recorded in the Land Registry.

Step four: If the beneficiary decides to sell the house, capital gains tax may have to be paid on any profit that is made. However, if you decide to rent the property out and become a landlord, then income tax may be due.

Inheritance tax on property 

In the event of someone’s death, their remaining estate may be liable for inheritance tax. The responsibility for making sure that this tax is paid, based on the value of the estate, including the house, is down to the designated personal representative.

Inheritance tax is charged at 40% on the value of the estate, and everyone is entitled to an inheritance tax allowance of £325,000. In addition to this sum, if the right conditions are met, a deceased person may be able to inherit their late spouse’s tax allowance and therefore have an inheritance tax allowance of £650,000 as the threshold before tax is due.

Where the property is passed down to a direct descendent, such as a child, rather than to something like a charity, etc, then an additional allowance of £175,000 (2020/21) can be given and this is known as the residence nil rate band. So, once all these potential allowances are taken into account, the beneficiary could have an inheritance tax allowance of about £1,000,000.

Capital gains tax due on inherited property

If a beneficiary receives the transfer of property rather than the property being sold first, they might be liable for capital gains tax when selling the inherited property. For this to happen, two conditions must be met:

• If it is a second home.
• If the property has increased in value when sold. This is based only on the increase in value since the person leaving the property has died, it doesn’t apply to when they were living.

Income tax due on inherited property

Once an inherited property has been officially transferred to someone, income tax is due and payable on any profit made from the property. Many people decide to rent out the property to help cover any costs, such as mortgage payments, and so this will need to be taken into account when inhering property.

Profits from the property’s rental income must be reported to HMRC.Even for those that typically do their own tax returns, hiring the services of a tax accountant is a good idea due to the complexities involved with inheritance tax.

Stamp duty

The only time when stamp duty tax may be required to be paid is when more than one beneficiary shares the inherited property and one of them buys the other out. As with any other aspect of inheriting property, it’s strongly advisable to speak with a solicitor about this, particularly if you are the beneficiary and are thinking of buying the others out.

Inheriting property shared with others

With property that is left to be shared among a group of siblings, the situation is a little more complex. When decisions are to be made about what happens to the property, a consensus will need to be reached before any action can be taken. A joint decision will have to be made on whether to sell the property or not, and when it comes to siblings jointly owning it, it can be the simplest solution, as the money can be evenly split among them.

However, when a consensus cannot be reached among the siblings to sell the property, then a viable alternative is to rent it out and become joint landlords, with one person perhaps designated to run the investment. Another option is to hand it over to a property management company to run it on your behalf, although this will eat into the profits somewhat.

Property insurance

Beneficiaries of inherited property will need to ensure they have adequate insurance protection. Of course, the type and cost of the insurance will depend on what decision is made about what to do with the property, such as living in it, leaving it empty, or renting it out.

• If the property is kept but the inheritor remains living in their current home, then a second home insurance policy will be required to adequately protect the property.
• Landlord’s insurance will be required if the property is let out for rental income.
• If a property is left vacant, perhaps because the beneficiary needs more time to think about what to do with it, then unoccupied insurance cover is worth considering to protect the property, even if only for a short period but for more than 30 days.