Inheriting a property can be a significant life event, often accompanied by both emotional and practical considerations. Whether it's a family home, a holiday retreat, or an investment property, there are several important factors to consider when navigating this new responsibility. But it's not just a matter of moving in or selling. There's a complex legal process that must be completed first.
Understanding the legal and financial aspects of inheriting a house is paramount. Consulting with legal and financial professionals can clarify inheritance laws, tax implications, and any necessary paperwork for transferring ownership to make you the legal owner. Here's a brief guide to what happens when you inherit a property:
Locating the Will
Your first task is to determine if there's a will. If so, you'll need to ascertain your legal relationship with the property. Are you a named beneficiary or executor? If there's no will (referred to as dying intestate), the next of kin may apply for a grant of administration to handle the estate. The will also sets out if the property has any form of life interest trust applying. This is common where second marriages and relationships apply.
Probate Process
Probate is the legal process where the executor settles the deceased's affairs.[1] This involves assessing assets, settling debts and taxes, and distributing the estate according to the will. This process can take up to a year, giving you time to decide what to do with the inherited property. The Probate Service will review your application, and you can track its progress online.2
Mortgage Status
Until probate is complete, the property isn't legally yours, but if there's a mortgage on the property, contact the lender to discuss the situation. Most mortgages have a grace period during probate. Once you own the property, you're responsible for repayments. If the deceased had a life insurance policy, it may cover the outstanding mortgage.
Transfer of Ownership
After probate, property ownership is transferred to you. You can register your ownership at the Land Registry. Unless you plan to sell or mortgage the property, this isn't mandatory, but it provides clear proof of ownership.3
Tax Implications
Inheriting a property may mean you need to pay tax. You don't pay stamp duty on inherited property but may need to pay inheritance tax.4 You won’t need to pay inheritance tax if you're inheriting from a civil partner or spouse. Inheritance tax is typically paid from the deceased's estate but may be covered by beneficiaries if desired. Complex rules govern inheritance tax, and there are ways to protect a property portfolio from this tax, so it’s wise to consult a financial advisor.
You also won't need to pay capital gains tax immediately, but it may apply if you sell the property. This is calculated based on your income and profit from the sale. If you do plan to sell the property, you should clear the property and have it valued by local estate agents. Find out the value in its current state as well as if you carry out renovations.
If you inherit property that’s buy-to-let or a holiday property and you intend to receive rent from it, then you’ll also need to pay income tax on this.
If you intend to leave a property to someone in future, it’s worth considering ways to make the transaction easier. Leaving funds in a trust for example, will help them to settle the inheritance tax bill within the six month deadline. This could also mean that your own beneficiaries can avoid a forced sale.
Seeking Professional Advice
It’s advisable to seek guidance from a financial advisor. Their expertise can provide valuable insights and assistance in navigating the complexities of inheriting a property, as well as helping you decide whether to keep or sell the property, or exploring alternative options.
Our colleagues in Mercer Private Wealth can help with this or any aspect of inheritance tax planning. Find out more about what they can offer on their website www.uk.mercer.com/mercer-private-wealth or get in touch via email privatewealth@mercer.com.
Insurance Cover
Review the property's insurance cover to ensure adequate protection against potential risks such as floods, liability claims, or damage to the property. Consider updating or arranging additional insurance policies to mitigate financial risks associated with property ownership.
Insurers will provide cover based on the nature of use of the property, for example a holiday home, unoccupied property or let to tenants. If the property is unoccupied, they may need to understand what contingencies are in play, such as security or internal inspections.
Inheriting a property is a significant responsibility that requires careful consideration of various factors. By addressing legal, financial and practical aspects, you can effectively manage and make informed decisions regarding the inherited property's future.
If you’re looking for advice regarding home insurance requirements, such as high value home insurance, second home insurance or perhaps renovation insurance, please get in touch and an advisor will contact you.
Mercer Limited is authorised and regulated by the Financial Conduct Authority. Registered in England No. 984275. Registered Office: 1 Tower Place West, London, EC3R 5BU.
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