When it comes to inheriting property, Stamp Duty does not automatically apply, somewhat simplifying inheriting property from a tax perspective. Unlike purchasing a property, where Stamp Duty is payable based on its value at sale, the rules concerning Stamp Duty in the context of inheritance are designed to ensure that the transfer of property from a deceased individual to their heir does not immediately incur extra costs.
However, charges from Stamp Duty can still come into play later depending on what the beneficiary does next with the property and their broader property portfolio. There are multiple ways this can play out with inheriting property and it can become further complicated depending on the circumstances of the inheritance itself.
How Inheriting Property Works
If parents pass away and they have not already gifted their assets to children, then the family home along with all other property they own, will be valued as part of their estate. The children and any other beneficiaries named by the parents, will then either inherit the property or, part of a share in the property and become the new legal owners.
Whilst a beneficiary may be acquiring a new property, inheriting it does not automatically trigger Stamp Duty charges as it is not an outright property purchase. However, if the inherited estate exceeds the inheritance tax threshold known as the Nil-Rate Band, which is currently £325,000, then the estate and any property inherited should be subject to Inheritance Tax.
Any estate valued above this threshold will incur a 40% tax on the total value of the estate. However, exemptions do exist, such as transferring property to a spouse, civil partner, or charity, as well as a higher threshold for leaving property to direct descendants such as children or, grandchildren. Whilst it is possible to avoid paying inheritance tax on property if it is below the threshold or, through other exemptions, Stamp Duty can still apply in several different scenarios.
What Charges Can Come From Stamp Duty On Inherited Property?
Inherited property’s future usage can trigger tax obligations, particularly if a beneficiary decides to purchase additional properties. If the inherited home becomes a second property, the beneficiary may be liable for the higher rates and surcharges of Stamp Duty associated with owning multiple properties.
Stamp Duty imposes a surcharge on second homes of an additional 3% on top of the standard rates, and this applies to whether the property is bought, gifted, or inherited. As a result, inheriting a property can incur greater expense on future purchases if a beneficiary already owns or plans to buy more properties as with each new purchase, the surcharge will be applied.
Additionally, inheriting property jointly with other beneficiaries such as siblings, introduces further complexities concerning Stamp Duty. If you wish to buy out the shares of other beneficiaries, Stamp Duty may still be applicable depending on the value of the share you are acquiring. The key element here is whether the value of the transaction exceeds the Stamp Duty threshold, currently at £250,000 for residential properties.
For example, if two siblings inherit a property and one wishes to buy the other out to take full ownership, the Stamp Duty calculation would be based on the value of the share purchased from one sibling. If the share purchased was above the £250,000 threshold, then standard Stamp Duty charges will apply.
However, it is important to note that from April 2025, Stamp Duty thresholds are changing. The current rate of 0% tax below the £250,000 mark will be halved, to £125,000. This will incur significant charges for transferring or purchasing shares from inherited property and will see higher surcharges for properties which are classed as second homes.
First-time buyers benefit from Stamp Duty relief on property purchases under £425,000, paying no tax on the first £425,000, and a reduced rate on properties up to £625,000. However, if a property is inherited first, this typically removes first-time buyer status, no longer qualifying those inheriting a property for these benefits if they decide to purchase another property or, if they inherit multiple properties at the same time as the relief can only be applied once.
In this event, surcharges for stamp duty will become applicable for every additional property that is inherited and all future property purchases will be treated as additional purchases too, meaning the surcharge will continue to be applied, along with the standard rate of stamp duty.
Mortgages And Stamp Duty On Inherited Property
Complications can arise from mortgages on inherited properties which introduces another potential scenario for Stamp Duty obligations. If a beneficiary decides to assume the mortgage on a property they inherit, Stamp Duty might be due on the outstanding loan amount.
The reason for this is that the government considers mortgage transfers as a form of “consideration”, which breaks the threshold for paying no tax on an inherited property. If the value of an inherited property exceeds the Stamp Duty threshold, a tax charge would be payable on the portion of the mortgage balance of that property.
This can lead to significant additional costs from inheriting property, particularly if the property has a high outstanding mortgage. For example; If you inherit a property worth £700,000 with an outstanding mortgage of £400,000 and take on the mortgage, you may be liable for tax based on the mortgage balance.
Stamp Duty would apply at a rate of 2% on the amount above the threshold limit of £125,000, and 5% on the remaining £150,000, resulting in a total charge of £10,000 to inherit that property with a mortgage. If multiple properties are inherited, then charges will become higher due to the additional surcharge from owning multiple properties.
While Stamp Duty isn’t immediately due upon inheriting property, understanding how this tax interacts with future transactions and mortgage arrangements is essential for effective estate management and beneficiaries should plan strategically, whether they intend to sell, occupy, or invest further into property.
Consulting with legal and financial experts is recommended to navigate the complexities of inheritance Tax, Stamp Duty, and any of its potential surcharges, ensuring that any future inheritance or purchase aligns with any tax obligations that apply to owning or inheriting property.
