What are the options after inheriting property?

Most people will think the main decision to make is whether to sell the home, or keep it to live in or rent out.

But, in fact, the options are often far more complex than that, particularly if the house has been left to more than one person.

The situation is usually complicated by the fact that the reason most people are suddenly left with a property is because of the abrupt death of a family member or loved one.

Simon Heawood, chief executive at Bricklane, says: “It’s important to remember that inheriting residential property can be an emotional experience as well as a financial one. 

“The inherited property may well have been a family home rather than an asset purely for investment. This can become even more complicated when there are multiple heirs who are each likely to have a different financial outlook.”

He suggests the first thing to do is to get advice.

A would-be first-time buyer may suddenly inherit a property that gives them a ready-made home, but in many cases it’s more likely to pose the question of whether to sell the property.David Hollingworth

“It need not necessarily be just from a financial adviser – a solicitor may be the right first port of call to understand the legal position of the property, and to structure and administer ownership of the property if you intend to hold it,” he explains. 

“Where properties are inherited, there is no stamp duty to pay, but there may be other considerations specific to your situation, particularly if structuring between heirs is a consideration, or if legal structures such as trusts are involved.”

Mr Heawood confirms once ownership and tax position has been established, there are clear options in the short term.

“The property could be sold on the open market or kept as a buy-to-let, but beware the tax-implications. 

“There might be options to ‘keep the property in the family’ – whether by one party buying out another, or one renting off the group. If you pick this latter option make sure there is clear agreement across heirs, if possible with written legal contracts,” he insists.

Location, location, location

The decision to sell the property might be a fairly straightforward one, particularly if the clients who have inherited a property already own a house and the location of the inherited home is not suitable, even as a second home.

David Hollingworth, associate director at London & Country, says the decision will come down to individual circumstances but age may also be a factor.

"A would-be first-time buyer may suddenly inherit a property that gives them a ready-made home, but in many cases it’s more likely to pose the question of whether to sell the property," he suggests.

"Selling could provide valuable deposit funds for a young beneficiary hoping to get on the ladder, enabling them to purchase the right type of property in the right location to suit them.

"Older beneficiaries may well be in a quite different position with their own home already. Selling might still suit them in releasing the equity that could enable them to pay off their own mortgage or be used toward retirement savings or investment."

If it is a property that has not been in the family for a long time, this may also make the decision to sell a lot easier.

There is another reason, of course, that many people decide not to keep the house for themselves – money.

Paresh Raja, chief executive of Market Financial Solutions, says its research found 36 per cent of UK adults are set to inherit a property in some form.

"Of those, an overwhelming 67 per cent said that they had no intention of living in it, with 55 per cent stating that they plan on selling the property as soon as they can in order to re-invest the money in a different asset of their choosing," he reveals. 

"The desire to quickly sell a property is a result of a number of factors. For instance, for those living in London, the prospect of inheriting a property in a location outside of the city could result in them simply wanting to sell the property and use the capital from the sale to buy a home in their desired location.

"This quick approach to equity release may be tempting, but it is also important to consider the performance of the property market and whether it would be worth letting the inherited asset appreciate in value for a certain length of time before selling.”

“The temptation when inheriting a property can be to sell immediately and realise the windfall,” acknowledges Sam Mitchell, chief executive of HouseSimple.com.

If you sell immediately, you may have to sell at a discounted rate to take into account the current condition of the property.Sam Mitchell

“However, if you dispose of the asset and then decide to re-enter the property market again at a later date, you'll be facing a significant stamp duty bill, particularly if you already own a property and buying again would be classed as a second home,” he warns.

If the region or area the property is in is not familiar to those who have inherited it, then advisers may want to encourage their client to get to know more about it. 

Mr Mitchell explains: “Rather than rushing into a decision, it’s worth doing a little research into the local property market to see what the capital appreciation might be over the next three to five years and what rental values are achievable.”

Family matters

Another consideration for clients to take into account before selling up is the state of the property.

“Bear in mind, if you have inherited a property from an elderly family member, that it's likely the property may need some modernisation,” he notes.

"If you sell immediately, you may have to sell at a discounted rate to take into account the current condition of the property.”

Mr Mitchell suggests it is worth finding out how much it would cost your client to modernise the property, and what the uplift in price might be once the work is done.

It could be that the sentimental attachment might lead clients to decide to keep a family house and either move in, or use it as a second home – possibly shared among siblings if the property has been left to several family members.

But some in the industry encourage those who are considering this to exercise caution and be aware of the pitfalls.

Philip Hanley, director and independent financial adviser at Philip James Financial Services, acknowledges: “Keeping a house or other property which you inherit may seem like a good idea, especially if it was a family home or part of a family business. But it can become a noose around your and perhaps your siblings' necks. 

“You may all agree to keep it now, but circumstances change and if one wants to cash in their chips, it can lead to a forced sale and a big family fall out.”

He adds: “Remember also that capital gains are wiped out on death. If you hang onto the property and sell later, the tax could mount up.”

Alan Collett, fund manager at Hearthstone Investment, warns: “There may be sentimental reasons why a parent’s or grandparent’s home is retained, but unless this is with the firm intention of moving into it at some point in the future, it is best to separate sentiment from investment choice.”

He reminds advisers and their clients: “Keeping an inherited property is making an investment decision, even if it does not look like one. 

“By retaining the property, the other investments that could have been made with its value are being foregone, so it should be a carefully considered decision.”

eleanor.duncan@ft.com