Inheriting money in the UK can raise several tax-related questions, especially around whether HMRC needs to be informed. Many beneficiaries are unsure of their legal obligations when receiving inherited assets.
The responsibility often lies with the estate’s executor, but there are instances where you may have to deal directly with HMRC.
Understanding these scenarios is crucial to ensure compliance and avoid future complications. This guide will help you navigate the rules around inheritance and your responsibilities in the UK.
Do You Need to Inform HMRC When You Inherit Money in the UK?
Whether or not you need to inform HMRC directly depends on your role in the inheritance process. As a beneficiary, you are generally not required to notify HMRC when receiving money or assets. This responsibility typically falls on the executor or personal representative of the estate.
The executor is tasked with valuing the estate, completing inheritance tax forms such as IHT400, and ensuring all taxes are paid before assets are distributed.
Only in special circumstances, like receiving untaxed income from inherited assets, would HMRC require direct contact from you. In most cases, your only involvement is receiving the inheritance after taxes have been managed.
Is Inherited Money Taxable in the UK?
Inheritance itself is not considered income and is not taxed when received. However, there are specific tax circumstances to be aware of after receiving your inheritance.
For example, any income generated from the inherited money or assets, such as interest, rental income, or dividends, is taxable. If you receive income-producing assets, you must declare the profits on your self-assessment tax return.
The tax rate depends on your total income and personal tax band. So, while the inheritance isn’t directly taxed, the earnings derived from it can be subject to income tax in the future.
What Is Inheritance Tax and Who Pays It?
Inheritance Tax (IHT) is a tax on the estate of someone who has died, including their property, money, and possessions.
This tax is not usually paid by the beneficiary, but by the estate itself before distribution. It applies only when the estate exceeds certain thresholds.
- The standard Inheritance Tax rate is 40% on the value above the tax-free threshold.
- The current nil-rate band is £325,000.
- An additional main residence band may apply if the property is passed to children or grandchildren.
It is the executor’s responsibility to calculate and pay this tax, ensuring it is deducted before any assets are given to the beneficiaries.
How Much Can You Inherit Without Paying Tax in the UK?
Not all estates are subject to inheritance tax. The amount you can inherit without tax depends on the estate’s value and your relationship with the deceased. The tax-free threshold has remained unchanged for several years.
Inheritance Tax Thresholds in the UK
| Condition | Tax-Free Allowance |
| Standard Nil-Rate Band | £325,000 |
| Main Residence Nil-Rate Band | £175,000 |
| Married Couples/ Civil Partners | Up to £1 million |
| Gifts to Spouse or Charity | Fully Exempt |
If the estate’s value is below these thresholds, no inheritance tax is due. If the estate is over the threshold, only the amount exceeding the limit is taxed.
Do You Have to Report Inherited Property or Assets to HMRC?
You are not automatically required to report inherited property or assets to HMRC if you are just the beneficiary. This responsibility lies with the executor during probate.
They must report the total value of all assets, including property, savings, and investments, when submitting inheritance tax documents.
However, if you later earn income from these inherited assets, or sell them and make a profit, you must report those earnings. For example, if you rent out an inherited property or receive dividends from inherited shares, these must be included in your self-assessment return.
What Happens If You Receive Inheritance as a Gift Before Someone Dies?
Gifts given before death are often overlooked but can have tax implications depending on timing and value. These gifts are known as Potentially Exempt Transfers (PETs) and may become taxable if the donor dies within seven years of giving them.
Scenarios Where HMRC May Contact You:
- The donor gave you a large gift within seven years before passing.
- The total value of gifts exceeds the annual exemptions.
- The estate cannot cover the inheritance tax, making you liable for the unpaid amount.
Key Points to Remember:
- Gifts under £3,000 per year are exempt.
- If the donor survives more than seven years after the gift, it becomes tax-free.
- Taper relief reduces the tax owed if the donor lived more than three years after giving the gift.
Always keep records of any significant gifts received to help the executor with estate calculations later.
Are There Any Other Taxes on Inherited Money or Assets?
Although inheritance is not considered income, taxes can apply later depending on how you use or dispose of your inherited assets. If you generate income or sell assets, you may face:
- Income Tax: Applies to rental income, interest, or dividends from inherited investments.
- Capital Gains Tax (CGT): Applies if you sell inherited property, shares, or assets for more than their value at the time of inheritance.
It is important to value the assets accurately at the time of inheritance to calculate any future tax liability correctly. HMRC expects beneficiaries to comply with all tax reporting requirements once they take ownership of income-generating assets.
How Is Inheritance Tax Handled During Probate?
Inheritance tax is closely linked to the probate process. This is the legal procedure required to administer a deceased person’s estate and pay any outstanding taxes. The process involves several steps and legal obligations.
Valuing the Estate
The executor must calculate the total value of all the deceased’s assets including money, property, investments, and possessions. This valuation forms the basis for the inheritance tax calculation.
Submitting Tax Forms
If the estate exceeds the threshold, the executor must complete form IHT400 and submit it to HMRC. This form includes details of any gifts made within seven years and any liabilities.
Paying the Tax
Inheritance tax must be paid before probate is granted. The executor usually uses funds from the estate to settle the tax bill. In some cases, payment plans may be available, particularly for property assets.
Delays in probate often result from incomplete valuations or disputes among beneficiaries, but inheritance tax must be settled first in all cases.
Can You Avoid or Reduce Inheritance Tax Legally in the UK?
There are legal ways to reduce inheritance tax liability through proper estate planning. These strategies must be put in place well before death to be effective.
Some common methods include:
- Gifting: Giving away assets during your lifetime can reduce your taxable estate, especially if you survive more than seven years.
- Trusts: Placing money or property into trusts can separate them from your estate for tax purposes.
- Spousal Transfers: Assets left to a spouse or civil partner are exempt from inheritance tax.
- Charitable Donations: Gifts to UK-registered charities are also exempt.
Consulting a financial advisor ensures the strategy aligns with HMRC regulations and maximises your tax-free legacy.
Conclusion
Inheriting money in the UK doesn’t usually require you to inform HMRC directly, but certain circumstances may trigger tax obligations. Understanding your role as a beneficiary versus that of an executor is key to avoiding unnecessary complications.
While inheritance tax is generally handled by the estate, any income or profit you later earn from inherited assets must be declared. Being aware of these responsibilities ensures you remain compliant and make the most of your inheritance.
Frequently Asked Questions
What is the difference between probate and inheritance tax?
Probate is the legal process of administering a deceased person’s estate. Inheritance tax is the tax paid on the estate’s value above the tax-free threshold.
Do I need to inform HMRC if I inherit money from abroad?
Yes, if you bring inherited money into the UK from abroad and it generates income, you may need to report it for tax purposes.
Can inheritance affect my benefits or income-based entitlements?
Yes, inheritance can increase your savings and may affect eligibility for means-tested benefits such as Universal Credit.
How long does HMRC take to process inheritance tax matters?
HMRC typically takes 4 to 12 weeks to process inheritance tax forms, depending on the estate’s complexity.
Is inherited money considered income for tax purposes?
No, inherited money itself is not classed as income, but any profits it generates are subject to tax.
What happens if I don’t report inherited assets to HMRC?
Failing to report taxable income or gains from inherited assets may result in penalties, interest, and legal action.
How can I find out if inheritance tax has already been paid?
You can ask the executor or solicitor handling the estate for confirmation that inheritance tax has been settled.
