Inherited a Rental Property? What Should You Do First?

Inheriting a rental property can be a strange mix of emotions. You may be dealing with the loss of someone close to you while also trying to work out what happens to the house, the tenants and the rent. It can feel like there is a long list of things to sort out before you have even had time to think about what you actually want to do with the property.

The good news is that you do not have to make every decision straight away. Start by finding out exactly what you have inherited, get the paperwork together and understand the tax position. Once you know where you stand, the next steps become much easier.

What to Do When You Inherit a Rental Property? A Simple Guide

Start With the Property and Its Paperwork

First, find out as much as you can about the property. Is there a tenant living there? Is there a mortgage? Is a letting agent managing it? What rent is being paid, and when does the current tenancy agreement end?

Ask for copies of the tenancy agreement, recent rent statements, insurance documents, mortgage statements, repair invoices and any other paperwork connected with the property. If a letting agent has been handling things, ask them for a clear breakdown of what they currently do and what they will need from you now.

You should also find out how the property was transferred to you through the estate. Keep copies of the probate and valuation paperwork, as these documents may become useful later if you decide to sell.

Understand When You Became Responsible

One thing that can cause confusion is the difference between the period when the property belonged to the estate and the period after you inherited it.

Rental income received during the administration of an estate is dealt with as part of the estate’s affairs. Once the property has been passed to you and you start receiving the rental income, you need to consider your own tax position. Inheriting the property itself does not normally mean you immediately pay Income Tax or Capital Gains Tax, but rental income you receive afterwards may be taxable.

So, do not simply look at the rent for the whole year and treat it as your income. Find out when the property became yours and keep the records separate. If you are unsure about the dates, check the estate paperwork before completing any tax return.

Look at the Rent, Not Just the Money in Your Bank

It is easy to think of rental income as the amount that arrives in your account each month. There is more to it than that.

You need to look at the rent received alongside the costs of running the property. Depending on your circumstances, some costs may be allowable when working out your taxable rental profit. These can include certain repairs, insurance, letting agent fees and other day-to-day costs connected with renting out the property. Not every cost is treated in the same way, so keep the receipts rather than deciding for yourself that something is or is not deductible.

This is also a good time to get your records organised. Create a simple folder for rent received, repairs, insurance, agent fees and other property costs. If the previous owner kept good records, ask the executor or agent for anything that could help you understand the property’s history.

Check Your HMRC Position

If you have never been a landlord before, do not assume that the tax side will take care of itself. You may need to report your rental income through Self Assessment, depending on your circumstances and the amount of taxable profit you make. HMRC also has specific deadlines for telling them about rental income when you are not already filing a tax return.

This is one area where getting help can save you from making a mistake. An Accountant for landlords can look at your rental income, expenses and other income and explain what needs to be reported. You can then make decisions based on the actual figures rather than guessing how much tax you might owe.

What If the Property Was Not Properly Declared Before?

This can be an uncomfortable discovery, but it is better to deal with it than ignore it.

You may find that the person who owned the property did not declare all of the rental income before they died. You may also discover that rental income has not been reported correctly since you took over the property. These situations need to be looked at carefully because the correct way to deal with the issue depends on whose tax affairs are involved and which years are affected.

If you need an HMRC property rental income disclosure, do not guess the figures or simply send HMRC whatever amount you think is right. Gather the rental statements, bank records and expense information first. HMRC’s Let Property Campaign specifically covers certain cases where individuals have undisclosed rental income, including situations where someone has inherited a property and then rented it out.

If records are missing, that does not mean you should give up. HMRC’s guidance explains that estimates may sometimes be used when proper records cannot be obtained, but you should keep your workings and be able to explain how you reached the figures.

Decide What You Actually Want to Do With the Property

Once the immediate paperwork and tax questions are under control, you can think about whether you actually want to be a landlord. You might be happy to keep the property and continue renting it out. You might want to move into it yourself. Or you may decide that selling it is the better option for you. There is no reason to make this decision simply because you have inherited the property.

Look at the rent, mortgage, repairs, insurance, agent fees and other running costs. Then think about how much work you want to take on. Being a landlord can provide an income, but it also comes with responsibilities. If the property has tenants, you will need to make sure the tenancy and landlord obligations are properly managed.

If you eventually sell the property, Capital Gains Tax may need to be considered if it is not your main home and it has increased in value since you inherited it.

Do Not Rush Into Anything

An inherited rental property can be valuable, but it can also come with paperwork, tax questions and practical responsibilities that you did not expect. You do not need to solve everything at once.  Once the basics are clear, you can decide whether keeping, selling or changing the use of the property makes sense for you.

The important thing is to deal with each part properly instead of putting it off. A little work at the beginning can make owning the property much easier later.