Your Guide to Inheritance and Tax Implications

A guide to inheritance and tax implications

Inheritance can seem like a tricky thing to get your head around, especially when it comes to tax.

Although you will likely have to pay probate fees, and possibly also Inheritance Tax, you should not have to pay tax on items or funds you inherit.

If there are any taxes due on the estate, these will normally be paid prior to you receiving your inheritance. You may, however, have to pay taxes if you continue to financially benefit from your inheritance, so it’s important to be aware of the rules surrounding inheritance and tax.

Tax due before inheritance

It may be possible that too little or too much tax was paid by the deceased before their death, and either way this balance will need to be settled by the government.

To ensure that the right amount is paid, you will need to contact HMRC. You can use their Tell Us Once service to do this if the deceased lived in England, Scotland or Wales.

If you use this, HMRC and the DWP (Department for Work and Pensions) will then contact you about any tax that is due, plus any benefits and entitlements.

You will need the National Insurance Number of the deceased in order to contact HMRC, so make sure that you have this to hand.

Income Tax from the estate

Income that ‘belongs’ to the deceased’s estate must be reported to HMRC as part of probate, to ensure that the correct calculation of tax is paid by the estate.

This includes things such as rent from property, or income from a business, which is still received after their death, as usually this does not have tax deducted from it automatically and it must therefore be declared. Depending on where the incomes comes from, the Income Tax due will vary.

If the income comes from a property rented in the UK, a tax return will need to be completed for the deceased’s estate.

You will also need to complete a tax return and pay the Income Tax if the money comes from interest, or dividends from UK shareholdings or savings accounts, as neither of these deduct tax before it is paid out.

Additionally, you will need to fill out a tax return if there is any income from abroad, e.g. renting a property abroad, or shareholdings abroad, as again these don’t automatically have tax deducted from them. HMRC have a Shares and Assets Valuation helpline, which will help you to value any shares or other assets. 

Additionally, you will need to fill out a tax return if there is any income from abroad, e.g. renting a property abroad, or shareholdings abroad, as again these don’t automatically have tax deducted from them. 

Capital Gains Tax

Capital Gains Tax is paid when you sell an asset and make a profit from it. The gain is taxed, not the actual value of the asset.

This also applies under inheritance laws. If you inherit something worth £10,000, but later sell it for £30,000 you will be taxed on the £20,000 gain.

This is calculated based on how much the value has increased since the person’s death, not from when they purchased it.

Although, it is worth bearing in mind that Capital Gains Tax does not have to be paid on ‘unrealised gains’ - assets and property that were not sold prior to death.

However, if assets are sold during probate then Capital Gains Tax will usually apply.

Inheritance Tax

A type of tax that you will most likely have to pay is Inheritance Tax.

This applies if the estate is worth more than £325,000, and a rate of 40% tax is paid on estates worth more than this threshold (on all values above that amount) i.e. if the estate was worth £400,000, you’d pay 40% inheritance tax on the £75,000 above the threshold.

You don’t need to worry about paying Inheritance Tax out of your own pocket, as it is paid out of the deceased’s estate before the heirs get anything.

Although this does mean that the amount due to you is reduced (depending on how much Inheritance Tax is due).

The administrator of the estate will sort out how much is due, and the paying of this amount. Inheritance Tax has to be paid within six months, or HMRC will begin charging interest on what is owed.

Paying tax on inheritance

As an heir you should not generally have to pay tax when you inherit. However, if you received a gift from the deceased in the seven years preceding their death, it may be possible that you have to pay tax on that gift depending on its value and when it was given to you, and also your relation to the deceased.

For example, if you are married or in a civil partnership, you can pass on any assets worth up to £325,000 tax free.

You are also allocated an annual ‘gift allowance’ which allows you to pass on gifts worth less than £3,000 without the risk of the receiver being charged Inheritance Tax on this should you die within seven years.

Other exemptions include:

  • Gifts worth up to £250, of which you can gift as many as you’d like.
  • Wedding gifts made before the wedding (providing the wedding goes ahead) as long as they are:
    • Worth less than £5,000 if it is your child
    • Worth less than £2,500 if it is your grandchild
    • Worth less than £1,000 if given to a relative or friend
    • Gifts if they are to help with living costs of either an ex-spouse, child under 18/in full time education, or an elderly dependant.
    • Surplus income gifts. If you earn a surplus income, you may pay gifts from this e.g. to a child’s savings account
    • Charitable / political party gifts are also exempt.

To make sure these are exempt it is important to keep good records of all gifts given above the value of £250 (how much they are worth, who they were for etc.) as otherwise Inheritance Tax may still have to be paid on them.

If you wish to use the exemptions, it is best to speak to a legal expert first so they can advise you on the best way to keep records and ensure your gifts aren’t later charged for Inheritance Tax. 

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Note: First4Lawyers offers this information as guidance, not advice. Before taking any action, you should seek professional assistance tailored to your personal circumstances.

First4Lawyers and their partners are not tax advisors and we recommend you seek appropriate independent financial advice before making any decisions that relate to tax and property.

Last updated:  November 2017

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