Inheriting a property can be both a blessing and a challenge.
As an accidental landlord, you might find yourself at a crossroads, unsure whether to keep the property as a rental or sell it outright. You might have a lot of questions, like how do you put an inherited house in your name? What taxes will be owed when you inherit a house? What do you do about the mortgage on an inherited property? And should you keep, rent or sell the house?
This guide aims to help you navigate your options and make an informed decision on what’s best for you.
What is an accidental landlord?
An accidental landlord is someone who has come into property ownership unexpectedly, often through inheritance. If you've found yourself in this situation, you're not alone. Many people inherit properties and face the dilemma of what to do next.
What is probate, and how does it affect inherited property?
If the previous owner had a will, then it will have named executors. This could be a solicitor, relative or friend. They are responsible for paying any taxes, clearing debts and distributing the estate. This can be a lengthy and emotional process, taking several months.
During this time, you can do very little with the property you have inherited, as it isn’t technically yours until probate or confirmation (as it's called in Scotland) is complete. If the property has a mortgage, it is a good idea to get in touch with the lender and explain the situation.
What happens when you inherit a house with a mortgage?
When inheriting a house with a mortgage, and it is not yet fully paid off, you will have to take this into consideration when deciding what to do. You may also want to check whether the previous owner had life insurance that can be used to clear the mortgage.
If the mortgage wasn’t covered by a life insurance policy, you will need to speak to the mortgage lender to confirm what happens in the event of the death of the mortgage holder. In some instances, the lender will freeze mortgage payments until probate is sorted out. However, interest may continue during that period, so it is best to check the terms with the lender.
What should you do with the inherited property
Depending what you choose to do, you’ll have to pay certain taxes:
Inheritance tax - If the combined value of the previous owner’s estate is more than £325,000 then inheritance tax will normally be due. However, if you’re inheriting the property from a spouse or civil partner, the threshold may be up to £650,000.* If this is the case, it’s best to talk to a tax adviser to help you understand your personal situation better.
Capital gains tax - If you sell the property, you may be liable to pay capital gains tax.
Income tax - If you have inherited a buy-to-let or holiday let property, then you will have to pay income tax (according to your thresholds) when you start receiving income from rent.
The rental route
Renting out your inherited property can provide a steady stream of income and diversify your investments even further, whether you already own property or not. If you’re a first-time landlord, there’s no need to stress, as a local lettings agency, like us, can support you with your landlord needs and ensure that everything runs smoothly. However, it's important to consider factors such as ongoing maintenance costs, potential void periods and any legal responsibilities that come with property management.
Will I need a buy-to-let mortgage to let out my property?
If you intend to let the property and it has a residential mortgage, you will need to switch to a buy-to-let. Buy-to-let mortgages have some key differences
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The amount you can borrow on buy-to-let mortgages is based on how much rent the property can generate compared to the cost of the mortgage. Typically, lenders will want your expected rental income to meet at least 125% of the monthly interest payments on the loan.
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Buy-to-let mortgages may also require you to have a minimum salary, typically at least £20,000-£25,000.
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Interest rates are higher on buy-to-let mortgages than standard mortgages due to the greater risk involved.
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The minimum loan to value required for buy-to-let mortgages is generally 75-80% of the property’s value, so the minimum deposit required would be 20-25%.
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Arrangement fees on buy-to-let mortgages can be higher than on conventional mortgages. These are sometimes calculated as a percentage of the amount you borrow, rather than a flat fee.
Keep in mind that inheriting a property that’s already a buy-to-let, there may be variations. Talk to a mortgage consultant if this is the case, as they’ll be able to advise based on your situation.
The selling option
Selling the property can provide a cash lump sum, which might be beneficial depending on your financial situation. When considering this option, think about current market conditions, potential capital gains tax implications, any emotional attachment to the property, and your long-term financial goals.
Should I sell my inherited property?
Inflation has increased the cost of maintenance, repairs, and management, making property ownership more expensive. If you’re considering selling the property, we’d recommend starting with a quick and easy valuation.
So, what should you do?
The decision to rent or sell is a significant one. By carefully considering your options and seeking professional advice, you can make a choice that aligns with your financial goals and personal circumstances. Remember, there's no one-size-fits-all answer, and what works best for you will depend on your unique situation.
If you’re trying to decide whether selling or letting is the best option, the first step is to get a valuation on your property.
