Do I pay tax on my inheritance?

Unfortunately there is not a yes or no answer to this question, although we can provide some answers by breaking down the question into what tax type of tax is payable on inherited assets, when it is paid and who is responsible for paying it.

Prior to receiving their inheritance a beneficiary is not normally responsible for any taxed owed by the deceased or the deceased’s estate to HMRC. An estate can be liable for any income tax, or any other type of tax the deceased didn’t pay whilst alive, as well as inheritance tax on the estate. The executors are responsible for ensuring that the deceased’s personal tax affairs are settled and that any inheritance tax due from the estate has been taken care of. This is done during the administration of the estate and is calculated when applying for a grant of probate.

As a beneficiary you do not have to pay inheritance tax on what you have inherited, this is because if inheritance tax was due the estate would have already arranged for its payment before the distribution of any assets to the beneficiaries.

The exception to this is if you received a gift from the deceased in the past 7 years that was worth over £3000. The gift may be liable for inheritance tax depending on the value of the deceased’s estate and their available inheritance tax allowance. If the gift is liable for inheritance tax the amount due will be worked out based on a taper relief system.

It is once a beneficiary has received their inheritance that they then become responsible for any tax that is incurred due to owning the assets they have inherited. Depending on what you have inherited or what you choose to do with your inheritance will depend on whether you will incur tax, you may be liable to pay income tax or capital gains tax or both.

Income tax on inherited assets

A beneficiary may be liable for income tax on an asset or assets, if those assets are generating an income for the beneficiary.

An example of this would be if you inherited a rental property, if a beneficiary were to inherit a rental property and continue to rent it out they would be liable to pay tax on the income that they are receiving from the property.

Capital gains tax on inherited assets

A beneficiary may be liable to pay capital gains tax on the profit they make when they sell an asset they have inherited that has increased in value.

An example of this would be if a deceased’s property was valued at £300,000 for probate and that value was used in their inheritance tax application. If once the beneficiary has inherited the property they sell if for £400,000, the difference in the value used for probate and the actual sale amount could be liable for capital gains tax.

Enjoyed this? Read more posts by Final Duties about Probate Advice

Inheritance Tax – Residential Nil Rate Band

Inheritance Tax – Nil Rate Band and Transferable Nil Rate Band