If you have just inherited a property, you will most likely be dealing with a lot of emotions and it can be difficult to know where to start. One of your first concerns may be how much inheriting a home will cost you and the additional financial burden it can bring to your monthly outgoings.
So, what are the initial costs when you inherit a property?
The initial costs that you will need to consider when you inherit a property in the UK are:
- Property insurance
- Mortgage payments
- Property maintenance and bills
- Travel costs to inspect the property
- Tax – inheritance tax, capital gains tax and income tax
In this article, we will look at these costs in more detail and provide you with helpful hints and tips along the way…
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1. Property insurance
It is important that you insure the inherited property as soon as possible, as any insurance policies previously held by your loved one will most likely be terminated within 30 days of their death.
The type of insurance policy that you’ll need to take out will depend on what you plan on doing with the property.
- Unoccupied home insurance - if the property will be left unoccupied for longer than 30 days.
- Landlord insurance - if you plan on renting the property out.
- Home insurance – if you plan on moving into the property as your main home.
1.1 Unoccupied home insurance
If your inherited property will be left empty for longer than 30 days, you should take out an “unoccupied home insurance” policy.
As a general rule, a standard home insurance policy will not cover a house that has been left empty for longer than 30 days. This is because empty homes are more susceptible to break-ins and extensive damage and are therefore a higher risk for insurers.
Unoccupied home insurance (aka empty property policy) provides cover for the building and/or contents in properties that are left vacant for 30 days or more.
The period of cover provided by your unoccupied home insurance can vary from 3 – 12 months. This is more flexible than your standard home insurance, which tends to cover your property for 12 months.
Unoccupied home insurance policy conditions
You should be aware that you’ll need to meet some conditions for your unoccupied home insurance to be valid:
- Property inspections. You’ll need to check on the house at regular intervals (can be as often as every 7-14 days)
- Not your main home. The inherited house isn’t your main home and is empty most of the time
- Securely locked. Doors and windows must be securely locked
- Utility requirements. May have to have the central heating system turned on low during winter and/or turn off water at the main stopcock
You should check the conditions of the policy before taking it out, as you may not be able to meet certain conditions if you live far away from the property. If you cannot meet the conditions and something happens to the property, your policy will be invalidated.
1.2 Landlord insurance
You should take out “landlord insurance” if you plan on renting the inherited property out. This will protect you from the risks associated with renting out a property.
Landlord insurance policies can cover things such as:
- Building insurance
- Contents insurance
- Property owners’ liability insurance
- Tenant default
- Accidental damage
- Loss of rent
Ordinary home insurance won’t usually be sufficient to cover a rented property.
1.3 Home insurance
If you plan on living in the inherited property, you will need to take out ordinary home insurance.
Please note though that if you intend on leaving the home unoccupied for longer than 30 days (for example while you sell your current home), you will also need to take out unoccupied home insurance.
As we mentioned above, standard home insurance policies typically only cover your home if it’s left empty for 30 or 60 days (but this can be longer or shorter, depending on your policy’s wording).
2. Mortgage payments
Your loved one may have taken out a life policy or some form of mortgage death insurance before they died, which can be used to cover the cost of any outstanding mortgage debt.
Where your loved one didn’t take out a life insurance policy before they passed, there may be a mortgage to pay on the inherited house.
When you inherit a property with a mortgage, you will be responsible for the mortgage payments, even if you don’t live in the property. You inherit the property along with any mortgage debt.
The first thing you should do when you become aware that you are inheriting a property with a mortgage is to contact the mortgage lender. You should explain that the previous property owner has passed away and that you will be inheriting the property.
A lot of mortgage lenders have what’s known as a “grace period”, meaning that you have a repayment holiday until probate is complete and the property has been transferred to you.
It’s also worth checking the mortgage terms for that lender. They may include some useful information on what to do when a mortgage borrower passes and what they expect from you in terms of payments.
If you have inherited a property with a mortgage, use our guide to learn the different ways the mortgage debt can be settled.
3. Maintenance and bills
When you inherit a property, you’ll be responsible for any maintenance costs and bills.
3.1 Utility bills
The first thing you should do is take meter readings at the property as soon as possible.
You should then contact each of the providers to let them know that the homeowner has passed away and provide them with the up to date readings.
This will avoid you incurring large utility bills when the property is empty.
3.2 Council Tax
You’ll usually have to pay Council Tax on an inherited property, but your local council may offer a discount if the property is unoccupied.
You should get in touch with your local council to find out if they offer a discount and how much discount they offer, as the amount is up to them.
3.3 Maintenance of the property
You should also visit the property and make a list of all the potential repairs that may need to be carried out. You should use this opportunity to:
- Take meter readings (water, electricity and gas)
- Switch off the utilities
- Drain the water system
- Ensure the property is properly secured
- Install/switch on the controlled heating system to stop pipes bursting in cold weather
It is important that you do not let the property go into disrepair. An unmaintained house may attract attention from squatters if it’s clear from the outside that the property is empty.
If you don’t live near the property, call on friends and family who live locally to lend a helping hand or ask a friendly neighbour if they could mow the front lawn from time to time.
3.4 Additional considerations for leasehold properties
If you have inherited a leasehold property, you may also be responsible for things like ground rent and management fees.
To find out how much is owed, get in touch with the Freeholder.
If you are unsure who this is, you can refer to the lease (if you have been provided with a copy). Alternatively, you can carry out a Land Registry search here and download a pdf of the title register for a fee of £3.
4. Travel costs to inspect the property
When you inherit a property, a cost that is often overlooked is your travel costs to and from the property.
You may have to inspect the property weekly or fortnightly as a condition of your unoccupied home insurance. If you live far away from the property, mileage costs can quickly add up. Where possible, it is a good idea to lean on friends and family that live near the property for help.
If you plan on renting the property out, and don’t want to have to travel to the property every time the boiler breaks, you might want to employ the help of a property management company.
Property management companies offer support to residential landlords, including support with maintenance and repairs. Their fees can be expensive though.
If you don’t want to pay for a property management company, it is worth having some trusted local tradespeople on speed dial to assist with any problems that may arise. You can find trusted tradespeople on checkatrade.com.
There are three taxes you will need to consider if you inherit a property in the UK:
- Capital gains tax
- Inheritance tax
- Income tax
5.1 Capital Gains Tax
Capital gains tax (CGT) is a tax on any profit (“gain”) made when you sell something that’s increased in value in a tax year.
You don’t have to pay CGT when you sell your main home, but CGT may be due if you decide to sell your inherited property.
CGT is payable on any amount you make above the value of the property when you inherited it (minus any allowable deductions). Therefore, you will only have to pay CGT if you decide to sell your inherited home and make a profit.
If you plan on selling your inherited property and want to work out how much CGT might be due, you can use HMRC’s handy capital gains tax calculator.
If you want to avoid paying CGT on an inherited house, the best option would be to sell your inherited home quickly to avoid the chances of the property’s value increasing over time.
Make sure to read our in-depth guide on capital gains tax on inherited homes here for more information.
5.2 Inheritance Tax
Inheritance Tax is a tax on the property, money and possessions of someone who has passed away. The property, money and possessions of the person who has died is collectively known as the person’s “estate”.
The current Inheritance Tax rates are as follows:
If you have inherited a home, it’s unlikely that you will personally have to pay Inheritance Tax as beneficiaries of a will aren’t usually responsible for paying Inheritance Tax. It’s the executor’s or administrator’s responsibility to pay Inheritance Tax out of the estate to HMRC.
If you want to know more about inheritance tax, be sure to read our Inheritance Tax guide on inherited homes here.
5.3 Income Tax
Income Tax is only payable on an inherited property if you decide to rent it out to tenants.
You must pay Income Tax on any profit you make from renting out the inherited property.
You can claim what’s known as the “property allowance” and get up to £1,000 tax-free property income per year.
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By Matthew Cooper, Co-Founder of Home Selling Expert