Step 1: Probate
The first thing that happens when a property owner passes away is probate – the judicial process in which the deceased’s debts and affairs are sorted before inheritance is divided up. If there’s a will, the named executors are responsible for taking care of this process, which can take up to a year depending on the complexity of the issues. If there isn’t a will, the next of kin needs to apply for a ‘grant of representation’ to obtain the legal right to deal with the estate. Nothing can be done with the property until probate is complete, so as a beneficiary you will have plenty of time to make decisions about what to do with your inheritance.
Step 2: Inheritance Tax
The executor of the will organises payment of inheritance tax out of the deceased’s savings or by selling their assets, and this is due within 6 months of their death. The standard rate of inheritance tax is 40% of the total value of the estate, but the first £325,000 is not subject to any tax. If you are the direct descendant of the person who passed away (child or grandchild), this threshold can increase to £475,000 before you owe any tax.
Step 3: Decision Time
Once probate is complete, the executors will transfer ownership of the property into the beneficiary’s name by filling out forms with the Land Registry. You then need to decide whether to sell the property, move into it, or rent it out. Here are some factors to consider:
If you choose to sell the property, it will be subject to capital gains tax if it’s not your main residence (tax due on the difference between the property’s value when you inherited it and what it sells for). This can make selling sooner rather than later financially beneficial, although if the property is in need of some updating you may also wish to consider doing it up to increase its appeal for potential buyers and maximise the sale value.
If you rent the property you will become an ‘accidental landlord’ and need to pay income tax on the money you earn from renting it out. Bear in mind that if the property still has a mortgage, you’ll need to pass the affordability and credit checks and put the mortgage into your own name under the buy-to-let category.
If you recently inherited a property and are undecided what to do with it, the expert team at Lillicrap Chilcott will be happy to assist with a valuation or professional advice. Call us on 01872 273473 for more information.