Giving a property to a loved one is done by many Brits without a second thought, as they look to protect their original investment and ensure that hard-earned money to buy a house does not go to waste.
However, while many people may inherit a house as a means of stepping onto the property ladder, there are a number of common mistakes made when it comes to how inheritance tax works and how you might be charged for inheriting a property.
Here are some of the most common inheritance traps and how you can avoid falling victim of them.
You will not qualify as a first-time buyer if you have previously inherited a share in a property (File image)
What to look out for when inheriting a property or as a first-time buyer
Anyone buying a property for the first time in England and Northern Irelandis exempt from stamp duty on purchases worth up to £425,000.
As a result, they can a reduced rate of 5 per cent on the next £200,000 up to £625,000.
Anything with a valuation of over £625,000 is where first-time buyers may get caught out, as these properties do not qualify for first-time buyer relief, meaning the buyer is required to pay normal stamp duty rates.
It is also important to note that you will not qualify as a first-time buyer if you have previously inherited a share in a property.
Losing this relief on a property purchase worth £625,000 would cost you an additional £8,750 in tax.
However, you will not have to pay the surcharge if you have inherited a share of a property that is 50 per cent or less.
If you buy a home when you already have one you could be liable for the 3 percentage point stamp duty surcharge that applies to second-home owners and landlords.
You may be able to claim a refund of the stamp duty surcharge if you sell your share of an inherited property within three years.
Stamp duty rules on inherited property are complex — especially if selling your share in a home requires other beneficiaries to buy you out — so you should take the opportunity to seek professional advice from an inheritance specialist, according to The Times.
Do I need to pay capital gains tax when inheriting property?
CGT on property is taxed at a rate of 18 per cent for basic-rate taxpayers and 28 per cent for higher-rate payers (File image)
Although no capital gains tax (CGT) is due on a property inherited in a will, you will be liable for paying a tax bill if you do not live in the property as your main home and later sell it at a profit.
The amount of tax you are required to pay is based on how much the property has increased in value.
CGT on property is taxed at a rate of 18 per cent for basic-rate taxpayers and 28 per cent for higher-rate payers.
If you lived in the property as your main residence after inheriting it, you will qualify for principal private residence relief that could mean you avoid a CGT bill on any profit.
If you inherit a share of a property along with other relatives, you can each use your £6,000 annual CGT-free allowance to reduce your taxable gain.
However, this allowance is being reduced to £3,000 from April.
Nimesh Shah, who works for accountancy firm Blick Rothenberg, said: 'There is a misconception that people can give away property and survive seven years and that's the end of it. But there is a lot more to it than that.'
Be mindful of potential consequences if leaving a property in your will
t is a common misconception that transferring the legal ownership of the family home to your children during your lifetime will avoid any IHT liability (File image)
If you want to give a home to a family member other than a spouse or civil partner, they will need to pay CGT as if it had been sold at market value.
Anything left to a spouse or civil partner is exempt from incurring inheritance tax (IHT) and every estate gets a £325,000 tax-free allowance, which rises to £500,000 if a main home is left to a direct relative.
Shah said: 'If there was a time that the property wasn't occupied as the main home then CGT could also be owed on that period. If you are gifting a rental property or second home, then CGT will definitely be triggered.'
It is a common misconception that transferring the legal ownership of the family home to your children during your lifetime will avoid any IHT liability.
If you gave the family home to your children but continued to live in it, this would be considered as a 'gift with reservation' by HM Revenue & Customs.
On the flip side, should you give away an asset but continue to benefit from it, it will still be included in your estate for IHT purposes even if you live for the seven years after which most gifts become IHT-free.
Be wary of the seven-year rule
The seven-year rule can be a valuable tool in estate planning, but families should have a fail-safe in case it goes wrong.
If you live for seven years after making certain gifts, including property, they no longer form part of your estate and so will be exempt from IHT.
But if you die within seven years of making the gift, IHT will be charged on a sliding scale for any amount which exceeds the IHT allowance.
If you die within three years after making the gift the tax will be levied at the usual rate of 40 per cent on anything over the allowance.
The seven-year rule can be a valuable tool in estate planning, but families should have a fail-safe in case it goes wrong (File image)
William Edwards, who works at law firm Edwin Coe, said: 'It is really important that it is clearly set out in a will who has the burden of paying the tax on a failed gift, because it can get messy when there is more than one beneficiary of an estate.
'An example would be if one sibling was gifted a property from a parent in their lifetime with the intention that another sibling would eventually inherit other parts of the estate. But if the parent dies within seven years of making the gift, IHT will be due on the property.
'This will adversely affect the other sibling who didn't receive the property, but will now have to pay towards its tax bill from the wider estate unless other arrangements have been stipulated in the will.'
