Do You Pay Taxes on Inherited Money in The UK?

Inheritance is a cultural and social practice that has been practised worldwide for many decades. It involves passing wealth in the form of money, goods, and real estate from an individual to their loved ones. The person declared legally in the owner’s will to take care of their goods after their death enjoys the privilege of using them for their benefit.

However, in addition to these privileges, the owner has to follow certain government-enforced rules and laws regarding the inherited property. This includes ownership status and taxation on the property.

1. Do You Pay Taxes on Inherited Money in the UK?

In the UK, the beneficiary does not generally need to pay any tax for the inherited property at the time of inheritance. The inheritance is not classified as income or part of income tax. However, any interest or dividend from inheritance is taxable and must be declared.

Besides, the criteria that decide whether one must pay the tax depend on the type of inherited property and on the property owner’s legal procedure.

2. Inheritance Tax

The property owner can be called the personal representative, executor, or administrator. The personal representative for the estate usually pays an Inheritance Tax before giving the inheritance to the person. The standard inheritance tax is 40%.

However, under certain criteria, the person inheriting the property has to pay these taxes. HM Revenue and Customs will contact the beneficiary in the following cases:

• The person who died gave an amount of more than 325,000 euros as a gift 7 years before their death. No tax must be paid if they die after 7 years of providing the gifts. Examples of such gifts are cash, household or personal presents. This includes jewellery storage and attendant accessories like furniture, antique products, houses, buildings, stock shares listed on the London Stock Exchange, and unlisted shares two years before death.
• When the inherited property is put into a trust, the trust has to pay.
• The personal representative has not paid the inheritance tax before the inheritance of property or goods.
• Some tax must be paid on foreign country bank accounts and post office accounts, overseas pensions, authorized unit trusts, and open-ended investment companies.
• Anyone automatically inherits anything in joint accounts. An inheritance tax must be paid if the value exceeds the threshold of 325,000 euros.

Reforming UK Inheritance Tax for Fairness

The UK’s 40% inheritance tax rate is steep, impacting many families beyond the ultra-wealthy. This rate can significantly diminish the legacy individuals wish to leave behind, prompting the need for strategic financial planning to mitigate tax liabilities.

While taxation is necessary for public services, a more progressive structure, with thresholds that reflect modern property values and inflation, could offer a fairer system.

Reducing the rate and adjusting the threshold could encourage more efficient wealth distribution and investment within the economy.

James Beattie, CEO, Money Sprout

3. Income Tax on Inherited Property

 The beneficiary has to pay an income tax on the inherited property in the following cases:

• Interest is what one earns from inherited money.
• Dividends that are spent on the shares that are inherited.
• The amount of income tax paid depends on how much income is above one’s allowances and how much income falls on each income tax band.
• The personal allowances are up to 12,570 euros for each person. The tax rate is 20% up to 50,720 euros. 40% is the taxation rate for income between 50,271 euros and 125,140 euros. A tax rate of 45% is levied for income greater than 125,140 euros.
• An allowance is made for dividends up to 1000 euros from 2023 to 2024. Tax must be paid if the dividend amount exceeds 1000 euros. The dividend allowance varies each year.

4. Capital Gain Tax on Inherited Property

The beneficiary must pay capital tax if they sell the inherited shares. This tax is paid since the share goes up in value from the value at which it is purchased.

Shares over which the capital gains tax is payable include the shares not held in an ISA or a PEP, units trusts including investments such as bonds apart from the premium, and qualified corporate bond amounts.

Capital tax gain needs to be paid based on gain value. Some Capital Cain Tax Allowances are given to persons that do not require paying any Capital Tax Gain. The gain value is calculated as the difference in the value at which shares are sold and brought. However, in some special cases, the market value is taken. Some of these cases are:

• The market value is accepted as the gift date for the shares and investments as gifts.
• Assets that are sold for less than their worth to help the buyer; market value is acknowledged as the date of sale.
• The inherited assets have market value taken from the date of death.
• Assets that are owned before April 1982.

Complexities of Inheritance Taxation

In my perspective, taxes on shares people inherit can be complicated. On the one hand, governments need money to pay for important things. But taxes also affect families and the economy.

Some people think it’s not fair to tax inherited shares twice—once when they were earned and again when passed down. This might discourage saving and hurt what families can give to each other. It could also reduce business investment that creates jobs.

Figuring out what shares were worth when someone died is also difficult. Different appraisals lead to disagreements that go to court, using up government resources.

While programs like retirement need funding, policies also impact lives. Not all families are in the same situation. Things like family farms face specific struggles, too.

Overall, smart people disagree on balancing public money, individual ownership rights, and fairness between generations. Even experts see open questions about long-term effects that require good discussions to find the right path forward.

Loretta Kilday, DebtCC Spokesperson, Debt Consolidation Care

5. Exemptions from Inheritance Tax, Income Tax, and Capital Gain Tax

In the following cases, the person is exempted from paying any inheritance tax, income tax, or capital gain tax:

• No inheritance tax is levied on gifts between spouses and civil partners. They are exempt from paying the tax if they live in the UK permanently and are legally married or in a civil partnership with another person.
• Every financial year, the person can give some money or possessions free of Inheritance tax. Every person can provide 3,000 euros worth of gifts each tax year without any tax.
• Birthday and Christmas gifts given each year are exempted from inheritance tax.
• Moreover, it is also possible for the person to offer tax-free donations to the individuals obtaining them. This is possible if the person is married or in a civil partnership. One can give up to 5,000 euros to a child, 2,500 euros to a grandchild or great-grandchild, and 1,000 euros to any other person.
• When you inherit, the personal representative can give you an R185 (estate income form). This form provides the beneficiary with details about any income tax that the executive pays, exempting the beneficiary from the taxes that have already been paid.
• One does not need to pay capital tax if the shares are put into ISA, PEP, or shares of employers in Share Incentive Plans (SIPs).
• There is no need to pay capital tax on UK government gilts and premium bonds.

Promoting Fair Wealth Distribution

While this tax may seem burdensome for those inheriting wealth, it plays an important role in generating revenue for the government and promoting economic stability.

Implementing this tax could pose a challenge due to the emotional implications of inheriting assets.

Inheritors often have strong attachments to the properties or shares they receive, and imposing a tax on these assets can be seen as an additional burden during an already difficult time.

Some may argue that this tax is unfair as it targets those who are already going through a loss. However, it is important to consider the purpose of this tax.

Inheritance taxes, including the capital gains tax on inherited shares, aim to promote a more equal distribution of wealth and prevent the concentration of assets in the hands of a few individuals.

Without this tax, those who inherit large sums may accumulate even more wealth without contributing to society through taxes. This tax is only applied to gains from inherited assets that exceed a certain threshold.

This means that only those who receive significant amounts of wealth will be subject to the tax. In addition, there are exemptions and reliefs available for certain cases, such as family businesses or personal residences.

Overall, while there may be challenges in implementing this tax on inherited shares, it is a necessary measure to ensure a fair and balanced financial system. It promotes economic stability and prevents the concentration of wealth in the hands of a few individuals.

Linda Chavez, CMO, Eazy House Sale

The Takeaway

Therefore, one does not need to pay any tax and can enjoy the privilege of inherited goods and money. Usually, one pays the tax when this inherited property is used as a source of income. However, taxes must be paid in some special cases, as specified in the article.

Guest Author: Saket Kumar