A guide to inheriting property

guide to inheriting property / financial advisers nottingham

Have you recently inherited a property and you’re unsure what to do? In our guide to inheriting property, we look at how probate applies and inheritance tax (IHT). We also share the impact of the latest property law changes, which applies to landlords and second homes.

36% of people inherit a property

(Market Financial Solutions)

Waiting for probate

When you inherit a property, the first scenario you may face is probate. A grant of probate enables executors to administer someone’s estate after they die. Executors will have been named in the deceased’s will, and they will be responsible for paying any owed inheritance tax (IHT) and settling any debts. The estate includes property, savings, investments and other valuable assets, which will be totalled to provide an overall estate value.

Executors also distribute the estate to those who have inherited (the ‘beneficiaries’). Usually, there is more than one executor, and these are typically family members, but it can also be a friend or solicitor. If you have inherited the main residence of a parent or grandparent, there is an extra £175,000 allowance on top of the usual £325,000 inheritance tax threshold. If the estate is worth more, this would incur a 40% tax payment on the additional amount.

Remember, the property isn’t legally yours until probate has completed. You will need to wait until all taxes and debts have been paid from the estate. If the property has a mortgage, you will need to contact the mortgage provider and let them know the situation. Lenders often suspend mortgage repayments until the probate process is complete.

Outstanding mortgage

If the property has a mortgage and the deceased had life insurance, in some instances, this may pay out and cover the mortgage. If the mortgage isn’t covered by this type of insurance policy, the lender will be able to advise you on what needs to happen. Although payments are usually frozen, it’s worth noting that the interest may still accumulate while you’re waiting for probate to finish. Mortgages are considered a debt, which will need to be repaid.

Once probate has completed, inherited property will become legally yours to do with as you like. If there’s enough money or financial assets from the estate, you could look at paying off the mortgage. Otherwise, you may have to arrange a mortgage for the property in your own name. As this would be considered a new mortgage, you would have to pass an affordability test. This can cause issues for some people, especially when their own home is mortgaged.

Speak to your financial planner to see who they recommend for trusted mortgage advice.

Owning a second property

If you have inherited a second property, such as a holiday home or a buy-to-let, this will be classed as a source of income. Therefore, you would be expected to pay income tax on rental payments. If you have become an ‘accidental landlord’, you will need to consider how these tax implications will impact you. Where there’s an outstanding buy-to-let mortgage on the property, you will need to contact the lender and inform of them of the situation.

As an accidental landlord, there are different options available to you. Where there is a mortgage on the property, the lender might grant you a Consent to Let. This enables you to rent the property for up to 12 months using the same mortgage. After this time, you could consider selling the rental property or you could arrange a new mortgage. If you sell your property, Capital Gains Tax would apply – speak to our financial planners for advice.

In recent years, buy-to-let mortgages have become less attractive, as they tend to have higher interest rates. The terms differ too, so you might be expected to have a minimum salary, and the loan-to-value amount is usually 20 – 25%. As a landlord, you will be expected to pay income tax on your entire rental income. You would also need to take out landlord insurance to cover the property in case of damage or loss of rent.

Another factor to consider is the recent changes to ‘no-fault evictions’. Landlords can no longer evict tenants at short notice using a section 21 notice without due cause until their tenancy agreement has finished. Although the latest rules have given greater powers to landlords for valid grounds for possession, rental property sales have increased.

(In 2023) landlords will have sold 297,390 more homes than bought since 2016

(Hamptons International)

Financial advisers, Nottingham and Lincoln

When you inherit a property, it can be an emotional time, especially if you’re grieving for a loved one. It’s important to seek expert financial advice; our team include qualified and experienced Chartered Financial Planners. We have the expertise to advise you on suitable ways to manage your inheritance, including any property. We also work with trusted solicitors to advise on any legal matters.

Balance: Wealth Planning has been named as the New Model’s Top 100 Financial Planning Firms for the past five years. We have also been named as the Professional Adviser’s Best Financial Advisers to Work For in 2023. We have offices in both Nottingham and Lincoln.

Do you need estate advice relating to an inherited property? Get in touch to speak to our financial planners.