Capital Gains Tax When You Sell an Inherited Property: How the Gain Is Actually Calculated

Two separate taxes, two separate moments

It's easy to conflate Inheritance Tax and Capital Gains Tax when dealing with an inherited property, but they apply at entirely different points and to entirely different values:

• Inheritance Tax (IHT) is assessed on the estate at the point of death, based on the property's value at that time (among other assets).
• Capital Gains Tax (CGT) only becomes relevant later, if and when the beneficiary sells the property, and is based on how much the property's value has increased since the date of death.

Inheriting the property itself never triggers a CGT charge — only a subsequent disposal (sale, or in some cases a gift) does.

How the base cost is set

This is the single most important — and most misunderstood — mechanic. For CGT purposes, your base cost (the figure subtracted from the sale price to calculate your gain) is the property's probate value: its market value at the date of the deceased's death, as established for the estate's IHT return (or a separate professional valuation if IHT wasn't payable).

It is not what the original owner paid for the property decades earlier. If your late parent bought a house for £40,000 in 1985 and it was worth £350,000 at the date of their death, your base cost for CGT is £350,000 — not £40,000. You are only taxed on growth in value from the date you inherited it, not the entire lifetime gain the deceased would have faced had they sold it themselves.

Calculating the gain

The rate that applies

Gains on UK residential property are taxed using the residential property rates for Capital Gains Tax, which are higher than the rates applying to most other assets (such as shares). The specific rate you pay on the gain depends on your total taxable income for the year — the portion of your gain that falls within your basic-rate band is taxed at the lower residential rate, and any portion above that at the higher residential rate.

Where a property is inherited by multiple beneficiaries (e.g. siblings inheriting jointly), each beneficiary is separately liable for CGT on their own share of the gain, and each has their own annual CGT exemption to set against it — which can meaningfully reduce the overall family tax bill compared with a single owner selling the whole gain.

If you move into the inherited property

If you inherit a property and subsequently make it your main residence, you may be entitled to Private Residence Relief (PRR) for the portion of your ownership period during which it was genuinely your home. This doesn't eliminate CGT on the entire gain since the date of death — only the proportion of the gain relating to the period of actual residence is relieved, calculated on a time-apportioned basis across your total ownership period.

If the property was never your main residence (for example, you kept it as a rental or it sat empty while the estate was administered and then sold), no PRR applies and the full gain since the probate value is taxable, subject to allowable costs and your annual exemption.

The 60-day reporting deadline

Since the rules changed for UK residential property disposals, any taxable gain on selling residential property — including an inherited one — must be:

1. Reported to HMRC via the UK Property CGT return (a separate online service from standard Self Assessment)
2. With any CGT due paid within 60 days of completion

This is a strict deadline, separate from — and much shorter than — the normal Self Assessment filing timetable, and penalties apply for late reporting even if the eventual tax due is modest. Executors and beneficiaries selling shortly after probate is granted should factor this tight timeline into their planning, particularly if multiple beneficiaries each need to calculate and report their own share.

Selling quickly vs holding

Because the base cost resets to the date-of-death value, selling an inherited property reasonably promptly after probate — before significant further appreciation — often results in a small or even nil CGT liability, since there's been little time for the value to increase further. Holding the property for years before selling (for example, while renting it out) allows more time for a taxable gain to build up on top of the already-uplifted base cost.

Bottom line

Selling an inherited property is a distinct tax event from the inheritance itself, and the calculation starts fresh from the probate value at the date of death — not the original owner's purchase price. Understand your base cost, keep records of allowable costs and any period of personal residence, and don't miss the strict 60-day reporting and payment deadline once a sale completes.