What happens if you inherit a house?

What happens when I inherit a house? 

Initially the Executors of someone’s estate will need to apply for probate to be able to deal with the house and arrange for it to be transferred into your name. On average the probate process can take between six months and a year; during that time you will need to consider things like debts, expenses and the interests of other beneficiaries. 

What happens to the running costs?

While the Executors are waiting for probate they cannot access the monies in the deceased’s bank accounts, so it’s sensible to reduce the running costs by cancelling any internet, telephone or TV subscriptions. You may also be able to apply for an exemption to council tax if the property is vacant. That means you won’t have to pay council tax on the property during probate and for up to six months afterwards, provided it is still unoccupied.

We find that utility companies are usually compassionate in such circumstances and will roll up the gas, electricity, and water bills until the estate has funds available. If not, it often falls to the beneficiaries of the estate to pay the invoices and wait for reimbursement later on.

What happens with the house insurance?

The Executors will need to transfer the insurance into their name immediately and inform the insurer that the property is empty (if this is the case).  The insurer may charge a higher premium or add conditions regarding security and regular visits to the property.

What happens to the mortgage?

If the property has a mortgage, the deceased may have had a life-insurance policy that can be used to pay it off. Alternatively, if there are sufficient other assets within the estate the mortgage may be cleared using these funds. Repayments are usually frozen during probate, but it’s possible that interest may continue to build. If the property isn’t going to be sold (and the mortgage repaid) you need to find out if it can be transferred into your name by speaking to the mortgage lender. You will have to pass the affordability tests to be able to take on a mortgage on the property. 

What inheritance tax will I have to pay?

Inheritance Tax is due on estates worth more than £325,000. The rate is 40% of the estate that is above this threshold.  An additional main residence nil-rate band was introduced in 2017 for estates that leave their home to a direct descendent (ie children/ step-children/grandchildren). This is currently £150,000 and is due to increase to £175,000 in April 2020.Currently  this means that if you are leaving your estate (incorporating a house) to children your estate can be worth £475,000 before tax becomes payable. If you’re married (or within a civil partnership) this equates to £950,000 in total. Executors should settle the inheritance tax bill before the property is handed over. If there isn’t enough money in the estate, the home may have to be sold to settle the tax bill. However, if you don’t want to sell, you can pay the inheritance tax in annual instalments spread over ten years, with HMRC charging interest each year.

What should I do with the house?

You have three options: live in it, let it out or sell it. In many cases, property is inherited by a number of co-beneficiaries - siblings, for example.  In this situation, selling it is usually the easiest option and when the property is sold the proceeds are simply split.  Alternatively, one sibling may decide to buy the other siblings out - but in this case stamp duty land tax would need to be considered. 

Do I need to consider any other tax implications?

Capital Gains Tax may be due if the property has gone up in value between the death and the decision to sell. If the value has gone down, you could be due a refund on inheritance tax.  If you decide to let out the property, you’ll gain an income stream and will be required to pay income tax on it via self-assessment. Inheriting a property means you’re no longer a first-time buyer. This means that you won’t qualify for stamp-duty relief or be able to use a Lifetime ISA to buy a home. You will also have to pay the additional stamp duty rate if you buy another property whilst owning the inherited house.