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If you’re inheriting a house from your parents, it’s likely that you’re overwhelmed by many questions and can’t find the answers. Should you let it out? Will you sell the property? Is it possible to live in it for sometime?
You’re not alone.
Not many people understand what it takes before you transfer ownership of inherited property. It’s okay if you’re asking yourself ‘I inherited a house, what next?’ However, it is something you need to acquaint yourself with because when that time comes, you must make serious decisions.
Inheriting a house from your parents is something to plan for. But if you don’t already have a plan, don’t fret. Read on to learn what you need to do when you inherit a house, sell inherited property, and how to go about inheritance tax.
In this guide, we cover some questions you may have about inheriting a house and what you must do to transfer ownership.
Let’s get down to business.
The process of inheriting property can sometimes be akin to walking unchartered territory. So it is only wise to approach it armed with information. This might save your family from having to deal with conflicts or seeing your relations gang up against you, all because they want a share of the property. It’ll surprise you how families can turn against each other because of money.
When you’re an only child, the process is simple. The assumption is you’re the only one in line for their inheritance. Even in such a case, you can’t afford to be ignorant. You don’t want to make a mistake that will cost you your entire inheritance.
Now, to address your legal rights for matters relating to inheritance when there’s no Will, let’s first address a special category of people who can’t inherit a penny.
A child of the deceased will need to apply to the Probate Registry for a ‘Grant of Letters of administration.’ You can either do it on your own or instruct your solicitor to make the application for you.
This grant is important because once you have it, you’re now the ‘administrator’ of the estate. The grant contains critical information that includes proof of building societies, banks and other organisations you can access and distribute any funds held by the deceased. You may have to pay part or all of the inheritance tax that is due on the estate before being issued with a grant.
This process is usually referred to as ‘obtaining probate’ even though it is most appropriate when there’s a Will.
Is it necessary to obtain a grant? Well, not always.
You don’t need a grant if the value of the estate of the deceased is under £10,000 and doesn’t include any property, land, or shares.
You also won’t require a grant if the estate is held jointly because the surviving joint owner will assume full ownership.
Now that you’re sure about your chances of inheriting a house from your parents, what are the legal provisions where there’s no Will?
There are rules that help to decide who will inherit the estate. You may be in one of the following circumstances:
In such a case, the deceased’s blood relatives need to make the call. Realistically, the estate should belong to one that was closest to them. At this point as a surviving child to the deceased, inheriting a house from your parents comes automatically.
In the absence of blood relatives, the government takes over the house.
If you’re married and your partner dies, all their property will be transferred to you. Whether it is the property, car or any other asset that makes up their estate. This also applies in situations where you are separated from your spouse but are not legally divorced.
However, if you were living with the deceased as partners but weren’t legally married or in a civil partnership, you don’t get to inherit anything. This is a harsh reality that can be tough to process.
For children to qualify to inherit the deceased’s estate, where there’s a surviving partner, the estate must be valued at over £270,000. If the estate exceeds this value, the children will inherit equal shares from half of the estate exceeding the £270,000 threshold.
So, if the deceased’s three children are inheriting an estate worth £300,000, they’re only entitled to £30,000 to share equally the £270,000 is left to the surviving partner. If children are deceased, then the children’s inheritance is passed on to grandchildren.
The law doesn’t discriminate against children when it comes to inheriting a house from your parents. All children are treated the same. However, as a stepchild, you only inherit a house from your parents when there’s a Will along with legal documentation to prove your adoption status.
You also need to be at least 18 years before you can lay claim to your inheritance. Before then, you only have the lawful right to the estate.
When there’s no Will, children collectively inherit the estate before dividing it amongst themselves. Although this may seem this straightforward, it can sometimes end up with too many complications.
A house is often the biggest asset. Let’s stop to think about it for a moment. What happens when you want to sell a house whose ownership is under several people? It can be a challenge to sell, especially if your co-owner doesn’t warm to the idea of selling.
If the deceased has no surviving relatives, their estate becomes ‘vacant goods’ or ‘Bona Vacantia.’ This paves the way for the Treasury Solicitor to collect any houses, then dissolve the assets before passing them to the Crown.
I’m sure the first thing you want to know is whether the house you inherit from your parents is taxable.
The quick answer is yes, it often is, but not always.
Whether or not you’ll need to pay taxes when inheriting a house from your parents depends on two things; the house and the value of the other assets.
The most popular tax you’ll pay when you inherit property from your parents is inheritance tax.
Inheritance tax has a threshold just like income tax. Presently, it is charged on any part of the deceased’s estate above the threshold of £325,000. This threshold could go up to £475,000 if the estate is less than £2 million. If you’re in Wales or England, then you must pay inheritance tax on the deceased person’s estate (savings, stocks, and potential pensions) if it is more than the threshold.
The inheritance tax rate stands at 40%. This doesn’t mean that you’ll pay taxes for anything above this amount when inheriting your parents’ house.
Here’s why; the introduction of the Residence Nil-Rate Band (RNRB) in 2017 by the government made a provision for the addition of another £175,000 to the untaxable allowance if the deceased left a property.
The exact percentage of this allowance that you can lay claim will depend on the value of the house. Anything above £175,000 qualifies you for the full allowance. This means you pay inheritance tax for amounts above £500,000 that is £325,000+£175,000.
To simplify this further, if the house you’re inheriting from you parent is worth £200,000, you don’t need to pay taxes on the £25,000 unless you have also inherited assets valued at more than £300,000.
FYI: You can only use your RNRB for a single home, usually the deceased’s main place of residence. If you also inherit a buy to let portfolio, then RNRB won’t help much. You also need to take note of the threshold for the entire estate. That is, for each £2, the entire estate is above £2 million, there’s a £1 drop in your RNRB allowance.
To understand the above, let’s explore the practicality of tax boundaries on inherited property.
If you inherit an estate with a value of £500,000 and your tax-free threshold stands at £325,000 you’ll pay 40% of £175,000 as your inheritance tax. This translates to about £70,000 personal inheritance tax.
Something most people don’t know is that inheritance tax can go down to 36% for some assets. However, this applies where the deceased apportioned 10% of their estate to a charity in their Will.
Inheritance tax is not the only tax you need to take care of. There’s more.
This does in no way dispute the fact that inheritance tax is the major cost when inheriting property. Rather, you must know about your other tax obligations. They may not be that obvious but could end up being an ‘unexpected’ expense.
Here are two more taxes we think are important to look out for:
You don’t have to pay Stamp Duty (SDLT) when you inherit your parents’ house. You only pay stamp duty when buying a house and not when you acquire property through inheritance. Inheritance is not ‘transactional’ as it simply involves transferring your parents’ house to your name.
However, this doesn’t necessarily mean you’ll never have to pay Stamp Duty on property you inherited. For instance, if you opt to buy out the other joint owners, then it follows that you may attract a Stamp Duty charge. While this is mostly a question of ‘what if’ than ‘what will,’ you’re safer navigating this with the help of a financial advisor.
If you don’t want to be bogged down by inheritance tax and Stamp Duty Land Tax, you can avoid them altogether by buying your parents’ house. However, there’s a disclaimer; this option is not fool proof.
To explore this option, your parents will have to sell their house to you for a price below the market value. In such a case equity is a gift. So, if for example the house is worth £250,000, they could sell it to you at £150,000 so that the remaining £100,000 is a gift. Your parents may also gift you an entire house but continue to live in it.
This is a sure way of avoiding stamp duty and an added advantage for selling property you’re inheriting. Another option is when your parents are still alive 7 years after giving you the gift, you’ll be exempt from inheritance tax. You just need to have been paying income tax.
My advice is don’t be too quick to jump on these options as there are risks involved. Let me show you three major ones:
You need to keep in mind that inheriting a house from your parents while still on benefits may affect the amount of money you’ll receive from government. The perception is that the simple act of inheriting a house makes you richer.
Can I rent or sell my inherited house?
No matter how you look at it, the decision to rent or sell inherited property can be a tough one. But whatever you choose to do after inheriting a house from your parents is entirely up to you. It depends on your situation.
If you feel renting it out on a long-time basis is worth it, then go for it. If selling is the most viable option for you then so be it. Let’s take a closer look at the pros and cons of each of these options to help you make a decision:
Selling your inherited property
You don’t have to go through all that. Sell you house to a cash buying company and you will have the transaction completed within 30 days or less. However, keep in mind that while cash buying companies will buy your house fast on as is basis, they will not give you 100% of the value of your house.
Renting your inherited property
By renting out the house you inherit from your parents, you’ll have an additional stream of income. If you look at it from the business point of view, you can call it ‘cash flow.’ Even then, you don’t have the guarantee that this is a stable income. While you can talk of renting your house for £800 a month, you certainly can’t bet on having tenants all year round. There’ll be times when your house will be empty, meaning no income. It might just take a while before you can get a tenant again. But before then you’ll have to shelve some funds to take care of your marketing costs.
Having rental income may affect your tax bracket. The thought of having rental income is certainly tempting. However, you need to pause and ask yourself ‘is it worth it?’ Well, this depends on your tax situation.
Earnings of up to £50,000 attract 20% tax. However, if you’re earning £50,001, the tax doubles to 40%. This can potentially destroy the benefits of renting your property for income.
Handling buy to let property requires experience
Becoming a property owner overnight comes with responsibilities for which you are not prepared. Yet, you need to be equipped to oversee things just in case something goes wrong. If you’re new to buy to let you’re better off not jumping right into the thick of things. Instead, you could take some time to acquaint yourself with information about the industry from credible sources. This way, you will be able to spot a good tenant from a distance and even a good agent for that matter! Otherwise, the house you inherit from your parents could just become a liability.
Now that you have answers to your questions, you need to know that inheriting a house from deceased parents is not a one-step process. Rather, it’s a whole legal process you must follow.
The next few paragraphs give you a quick summary of what will happen when you transfer your late parents’ house to yourself.
Finding the Will is crucial. A Will is important in establishing a legal relationship with the deceased and the property. It shows whether you’re named as a beneficiary, thus giving you legal rights to their estate. If you’re named as an executor, you’ll also be responsible for taking care of the estate of your deceased parents.
As mentioned in the beginning, if there’s no Will, you need to apply for a ‘Grant of Letters of administration.’ This is the only way to obtain the right to deal with the estate.
Probate is the legal process that involves executors of a Will sorting out the affairs of the deceased. At this point, the executor evaluates and gathers all assets, both financial and property that the deceased owned at the time of death. Equally important, they move to settle any outstanding tax or bills before distributing whatever is left to the beneficiaries of the Will. This process is usually lengthy and might go on for up to a year before completion. This gives you time to decide what you’ll do with your inherited house.
While there isn’t much you can do with the property in terms of ownership until probate is complete, you’ll do well to check if the property has a mortgage. Where there’s a mortgage it’s advisable that you contact the lender to explain the situation. In most cases, lenders will suspend the repayment until the estate is sorted. Checking the mortgage also helps to avoid unforeseen situations. For instance, you might be thinking of going for a quick house sale only to be slowed down by a mortgage. When inheriting a house from your parent, you automatically assume the responsibility of mortgage repayments once the property becomes legally yours, regardless of whether you live there or not.
Upon completion of probate and when the Will is effectively administered, house ownership will be transferred to you so you can register ownership with the Land Registry. Of course, this is not mandatory unless the property is mortgaged or sold. However, this gives the best proof that you’re the owner of the property. Most importantly, it makes for a more straightforward process when you deal with property in the future.
Ultimately, make sure that whatever decision you make has your best interests at heart. Where possible, seek the help of a financial advisor to evaluate your options.