Will my partner pay tax on the property he inherits from me?
If I die tomorrow I am concerned about what capital gains tax might be payable by either my estate, or my partner. I have urged him to keep the property, and not sell, because it gives good rental income. He is not likely to make it his main residence.Connie
There are two taxes at play when someone dies: inheritance tax (IHT) and capital gains tax (CGT).
Looking at the IHT position, the properties in your estate are worth £535,000, and you do not specify what other assets you own that would increase the value of your estate further.
Everyone gets an allowance of £325,000 to pass on free of IHT. This is called the nil-rate band. In addition, if your estate is worth less than £2 million, you may also qualify for the residence nil-rate band of £175,000. However, this second allowance is only available if you leave your main residence to direct descendants, such as children or grandchildren.
You have not mentioned whether you have any, but this would be a key factor in determining whether the residence band applies. Given that you are widowed, if your late husband did not use either of his allowances (perhaps, for example, because he left everything to you and assets left to spouses or civil partners do not trigger IHT), then those allowances could be transferred to your estate.
In that case, you may be able to pass on a maximum £1 million free of IHT. This would comprise £650,000 to be set against your general estate and £350,000 against the value of your main residence, assuming that you left it to direct descendants and that your estate was not worth more than £2 million.
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Your executors will need to claim any allowances transferred from your late husband in a form called the IHT400. If no transferable allowances are available, then your executors will need to pay the IHT due on the value of the estate that exceeds your IHT allowances.
Under CGT rules, there will be no tax due when you die. Instead, your properties would be revalued to their market value at the date of your death and be passed to your beneficiaries. So, if your rental property was worth £185,000 at the time of your death, your partner would inherit it at that value and no CGT would be payable because no capital gain would have been made.
If he then sold the property later, he could be liable for CGT on any profit made over £185,000, assuming he never occupies it as his main residence. He would have an annual allowance of £3,000 to offset against any gain and would pay CGT at a rate of either 18 per cent or 24 per cent depending on his rate of income tax.
It's also worth highlighting that if and when he owes any CGT on the sale of the property, he would need to declare the gain and pay the tax within 60 days of completion through HMRC's CGT system, which is separate to the self-assessment return.
Kate Aitchison is a private client tax partner at the accountancy firm RSM UK. She advises on succession planning, investment structuring and tax residency
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