Do I Have To Pay Stamp Duty On An Inherited Property?

You have to pay Stamp Duty Land Tax (SDLT) on the purchase of a property or land with a value over a certain threshold in England and Northern Ireland.

But is SDLT payable when you inherit a property? 

You do not pay Stamp Duty on a property you inherit when you inherit it. However, you might end up paying the higher stamp duty rates on your purchase of another house in the following circumstances:

• Where you own more than 50% of an inherited property; or
• Where you do not sell an inherited property within three years of inheritance.

So how could inheriting a property affect your future house purchases and SDLT payments?  In this article we'll cover six different inheritance scenarios, so read on to learn more about Stamp Duty on inherited properties...

1. What is stamp duty?

Stamp Duty Land Tax (SDLT) is a tax you have to pay on the purchase of a property or land with a value over a certain threshold in England and Northern Ireland.  In Wales you would pay ‘land transaction tax’ (LTT) and in Scotland it is known as ‘land and buildings transaction tax’ (LBTT).    

If you want to find out more about the relevant thresholds and rates in your area, or need help calculating how much SDLT/LTT/LBTT you owe, we cover it all here in our ultimate guide to stamp duty in 2022.

1.1 Stamp duty on second home

If you are buying a second home, buy-to-let property or a holiday home in England or Northern Ireland for more than £40,000, you will be charged an additional 3% on top of the standard SDLT rates.  In Scotland and Wales, it is a 4% surcharge on top of the usual LBTT and LTT rates respectively for any additional properties bought for £40,000 or more.

This is a considerable increase to the stamp duty charged on your main residence. The 3% SDLT surcharge could be a key factor when you decide what to do with an inherited home.

If you need help selling an inherited property, check out my Ultimate Guide To Selling An Inherited Property or give me a call now on 0330 223 5568.

2. Stamp duty on inherited property

So when could SDLT play a factor when you inherit a home?  

As we’ve mentioned, you do not have to pay SDLT at the point you inherit the home. However, inheriting a home could have potential SDLT implications when it comes to future house purchases. In this article we'll run through a few different scenarios. See which is applicable to you to learn how inheriting a property could affect the amount of Stamp Duty you'll need to pay.

Example

• Let’s take Lisa who has just had her offer accepted on a house in Bristol for £400,000.
• This would be Lisa’s first home.
• Lisa’s cousin Bill passes away and leaves Lisa a specific gift of his flat in Chester in his Will.

2.1 Worst case scenario: Inheriting a property before buying your first home

Scenario #1

Before Lisa completes her purchase of the house in Bristol, the flat in Chester is transferred to Lisa from Bill’s estate. Will Lisa have to pay the 3% SDLT surcharge on her Bristol house purchase?

The answer is yes. Lisa has inherited a major interest (over 50%) in the Chester flat and so the subsequent purchase of her Bristol home will be classed as an “additional property” for SDLT purposes.

To make matters worse, Lisa will also miss out on first-time buyer relief.  Lisa is no longer classed as a “first time buyer” as she has acquired a major interest in a dwelling (which includes acquisitions by inheritance or gift).

*Total SDLT due on the Bristol home in scenario 1: £22,000

2.2 Best case scenario: Inheriting a property after buying your first home

Scenario #2

Lisa completes her purchase of the house in Bristol before the Chester flat is transferred to her from Bill’s estate. Is the additional 3% SDLT charge still due?

No, as the administration of the estate is not complete and so Lisa does not own an additional residential property at the time of completion of her Bristol home.    

Lisa will also get the benefit of first-time buyer relief as she is a first-time buyer who intends to occupy the Bristol property as her only or main residence and the Bristol house purchase price does not exceed £500,000. She will therefore not have to pay any SDLT up to and including £300,000 and will have to pay SDLT at a rate of 5% on the remaining £100,000.  

*Total SDLT due on the Bristol home in scenario 2: £5,000

2.3 Inheriting 50% or less of a property before buying your first home

Scenario #3

Bill gifts his Chester flat in his Will equally between Lisa and Lisa’s brother, Anton.  Lisa completes on the purchase of the house in Bristol within three years of her inheriting her share of the Chester flat.

In the three-year period from the date of inheritance, Lisa is not subject to the higher rates of SDLT because her share in the inherited property does not exceed 50% and is not therefore taken into account.  

Lisa does not get the benefit of first-time buyer relief, as she has acquired a major interest in a dwelling. A "major interest" is any interest in a freehold or leasehold property. Lisa's interest would not be classed as a "major interest" if she inherited an interest in a lease with less than 21 years to expiry.

*Total SDLT due on the Bristol home in scenario 3: £10,000

2.4 Buying someone out of an inherited house whilst being an existing homeowner

Scenario #4

Lisa completed on the purchase of the Bristol home before the Chester flat is transferred from Bill’s estate to Lisa and Anton equally. During the three-year period beginning with the date of inheritance, Lisa buys Anton’s beneficial share in the Chester flat for £200,000.  

This scenario will be most relevant to you if you're looking into the stamp duty payable when buying siblings out of an inherited property.

In our example, because Lisa already owns the Bristol home, the higher SDLT rates will apply to her purchase of Anton’s share in the Chester flat.  Although Lisa purchases Anton’s share in the three-year period from the date of inheritance, Lisa’s interest in the Chester flat is now classed as a “major interest” because her share exceeds 50%.  

Lisa would have qualified for first-time buyer relief on her purchase of the Bristol home.

*Total SDLT due on the Bristol home in scenario 4: £5,000

*Total SDLT due on Anton’s share of the Chester flat in scenario 4: £7,500

2.5 Buying your first home more than three years after inheriting a share of a property

Scenario #5

Lisa pulls out of her purchase of the Bristol house and Lisa and Anton both decide to keep hold of their equal share in the Chester flat.  Three years down the line, Lisa finds another dream home in Bristol for £400,000 and her offer is accepted.

As Lisa has not disposed of her interest in the inherited Chester flat within three years of inheritance, the higher rates will apply on Lisa’s purchase of the Bristol home provided that Lisa’s share in the Chester flat is then worth £40,000 or more.

*Total SDLT due on the Bristol home in scenario 5: £22,000

2.6 Buying and selling whilst owning an inherited property

Scenario #6

Lisa is now looking to relocate from her home in Bristol to a property in Manchester with a purchase price of £500,000.  Lisa still owns her 50% share of the inherited Chester flat.  Will Lisa have to pay the higher rates of stamp duty when she buys the Manchester home?

The higher stamp duty rates do not apply if an individual is replacing his/her only or main residence.

If Lisa sells her Bristol home before purchasing the new home in Manchester, Lisa will only pay the “normal” stamp duty rates on the new property purchase.

If Lisa doesn’t manage to sell her Bristol home before completing on the Manchester property, she will pay the higher rates upfront but, provided Lisa then sells the Bristol flat within three years of the new purchase, Lisa can apply to HMRC for a refund of the additional amount paid.  You must apply for any repayment within 12 months of disposing of your old main residence.

*Total SDLT due on the Manchester home in scenario 6 if the Bristol home is sold prior to completion: £15,000

*Total SDLT due on the Manchester home if the Bristol home is sold post-completion: £30,000 BUT if Lisa disposes of the Bristol home within 3 years she might be eligible for a refund of £15,000.  

3. Other taxes to think about

It is also worth keeping in mind the other taxes that could be due on a property you inherit:

3.1 Inheritance Tax

This is the tax payable on the estate (the property, money and possessions) of someone who’s died where the value of the estate is above a certain threshold.  The personal representative or administrator is normally responsible for arranging the payment of IHT from the estate.  

3.2 Capital Gains Tax

If you choose to sell the property you have inherited and it isn’t your main home, you may have to pay capital gains tax if it has risen in value when you come to sell it.  You will only pay CGT on the difference in value from the date you inherit the property to the date you sell the property.  

Related: To learn more check out our full guide: Will I have to pay Capital Gains Tax on an inherited property?

You must remember to tell HMRC which property is your main home within 2 years of inheriting the property.  Otherwise, when you come to sell one of the properties, HMRC will make the decision for you.

3.3 Income Tax

If you decide to rent out your inherited property, you may have to pay tax on the rental income.

4. Selling an inherited property: How we can help

While inheriting a property can be positive for you financially, there are many difficulties that can come with it. You may not have the time or resources to maintain the property, or you may simply want to release funds to use elsewhere.

Selling an inherited property can be a lengthy and difficult process, and you may prefer to opt for a quicker alternative to bring a close to things more quickly.

‍If you want to discuss your options or have any questions on SDLT or selling an inherited property, give me a call now on 0330 223 5568.