Tax on inheritance

jem16

sasparillo wrote:

Hi,

Wondering whether anyone had an answer on this? Re-reading the thread, I've also had the impression that we are only talking about people who don't earn enough to pay income tax in any case. Can someone clarify, if you do earn enough to attract income tax and receive a legacy, is this included as income?

It is never treated as income, whether you are a non-taxpayer, basic rate or higher rate taxpayer.

And if not, do you always have to remember to deduct 5,000 GBP when working out liability for income tax, unless you spend part or the whole of it and then have to keep a track of how much is left of the 5,000 GBP? And then the interest would be taxed as income? How does the Inland Revenue then keep a track on which people do receive genuinely as an inheritance and which people are just trying it on?

I'm not sure what you're getting at here.

As far as I'm concerned income comes from my job, my pension, savings interest & dividends. All of this info is on a P60 or tax certificate. I would completely ignore any inheritance as it doesn't count towards any of the above. If it ends up in a savings account, the interest gained from it will be on my tax certificate from the bank.

Tiggs_2

lol....how can this simple a point be this complex to explain!


if your income is £1 per year and i give you ten zillion pounds as a gift...........................your income for the year is £1 still!

if you stick your £1 and the gift in the bank you now have ten zillion and one pounds earning interest - THAT interest is income.

sasparillo

Well, some years ago in the 1980s and into the 1990s it definitely was treated as income. It was incoming money and there was a section on the tax return "payments from estates". Does this no longer exist?

Obviously the money in savings was once income and has already been taxed so it is only the interest which is taxed.

What used to happen is that the beneficiaries then had to declare the legacy as income. As incoming money. Once it entered the savings pot, of course it had already been taxed and it was only the interest was taxed. Maybe you'reall younger than me and didn't know about this but it once was counted as income on the tax return as "Payment from estates".

However, if it is not now counted with income, I'm asking about how people work out even the interest for their tax return.

Am I right that if you put it with the rest of your savings, by the sound of it, you would always have to remember to deduct it from the rest of your savings for income tax purposes and also somehow work out the interest, which accrues only to that part of your savings which is from the legacy, to be included in your income tax return? I can see it becoming a rather complicated sum and I'm not sure I'd be able to do it. Can anybody give a formula for how to work this out if it is lumped in with other savings and maybe distributed amongst a few accounts?

My other question was how does the Inland Revenue then keep a track on which people do receive genuinely as an inheritance and which people are just trying it on?

Please don't get angry with me ... Maybe I'm a bit slow about this but this doesn't make sense to me yet. But I'm sure with all you knowledgeable people on the board, you can help make this clear for me ... And who knows, there may be others who are also puzzled about the same things as me ...

jem16

sasparillo wrote:

Am I right that if you put it with the rest of your savings, by the sound of it, you would always have to remember to deduct it from the rest of your savings for income tax purposes and also somehow work out the interest, which accrues only to that part of your savings which is from the legacy, to be included in your income tax return?

Why are you treating it any differently from all other savings?

All interest from savings, apart from ISAs is taxable, no matter where it came from. So if you earn £20 in interest that is what you enter on your tax return. It does not matter where the money came from before you put it in a savings account. So if you save money from your job or a flutter on the horses the interest is taxable.

My other question was how does the Inland Revenue then keep a track on which people do receive genuinely as an inheritance and which people are just trying it on?

If HMRC feel that your tax return was not correct, they would ask for the appropriate proof in the form of P60s, tax certificates etc. If you suddenly told them that you had no/very little taxable income one year they would look for further proof. If you genuinely received a large inheritance you would have some proof.

sasparillo

Hi,

Thanks for your answer.

Do you know when the "Payments from Estates" section taken out of the Income Tax return then? Everything now seems loaded in favour of a inherited wealth. In fact, it seems topsy turvey that earnings are very heavily taxed and legacies are not taxed! And then there are huge payments demanded in local taxes (differing amounts for different householders) for the same services!!!!!

And then apparently there are those resident in "tax havens" who pay no income tax at all - do you know how those work?!!!

Thinking about it, I suppose Capital Taxes Office is the state registration for legacies and knows who are the beneficiaries, isn't it, since they can draw up and receive all estate accounts?

klondyke

Haven't seen a tax return lately, being on PAYE, but 'payments from estates' may not necessarily be a lump sum when someone dies, but eg income from a trust set up under a will ages ago. Don't know what heading it comes under now, but Mr taxman likes to now how/where/why you have acquired any out of the ordinary lump sum - could be from lucky gambling (no tax on winnings), inheritance, (outright or potentially exempt transfer), or even stoozing. Main thing they are watching out for is money laundering. But sums such as these are not taxable per se, but as several people have said, the income earned from them is taxable. Stick it under the mattress and you need pay no tax, but neither will you earn any interest.

As to legacies not being taxed - the donor has already been taxed on them, why should the money involved be taxed twice? If inheritance tax is applied to the estate, then that also is a kind of double taxation.

Tax havens are places where there is little or no income tax anyway - you can emigrate to them, but any money/shares/whatever left behind in the UK will be taxed in normal way.

gamston

guy can someone advise me on this
dad died this year left around 200K under IHT threshold,
we want the money go to the grandchildren, but their parents are going though a break up
he had a unit trust of £29K and a bond of £30K
if i option to sell the unit trust and I recieve the money £29K
and my sister recieves the £30K from the bond as Beneficiary
will we have to pay capital gains tax,??

my dad got these unit trusts, and bonds years ago, and has never maximised his capital gains them, (ie he brought them and kept them, he did not sell and buy back "bed & breakfast" every few years to ensure he did not go over the £7000 capital gains allowance)

sasparillo

klondyke wrote:

Haven't seen a tax return lately, being on PAYE, but 'payments from estates' may not necessarily be a lump sum when someone dies, but eg income from a trust set up under a will ages ago. Don't know what heading it comes under now, but Mr taxman likes to now how/where/why you have acquired any out of the ordinary lump sum - could be from lucky gambling (no tax on winnings), inheritance, (outright or potentially exempt transfer), or even stoozing. Main thing they are watching out for is money laundering. But sums such as these are not taxable per se, but as several people have said, the income earned from them is taxable. Stick it under the mattress and you need pay no tax, but neither will you earn any interest.

As to legacies not being taxed - the donor has already been taxed on them, why should the money involved be taxed twice? If inheritance tax is applied to the estate, then that also is a kind of double taxation.

Tax havens are places where there is little or no income tax anyway - you can emigrate to them, but any money/shares/whatever left behind in the UK will be taxed in normal way.

Hi,

No, it used to be that any incoming money that people received from estates counted as income on the Income Tax form and everybody had to fill in the section "Payments from estates" and include it in their Income Tax return. Of course, I can't speak for the Royals and aristocrats who have always messed up the state tax system with their "eldest son inherits" and "dowagers" which is from the feudal system.

I'd still like to know when this changed and people were told inherited wealth and did not have to include this on their income tax return? Does anyone know when this was changed?

Your employer has also already been taxed on the money it pays out for your salary but you are still taxed for the money you receive. Incoming money is incoming money in the end.

It seems strange to me now that people are (heavily taxed) on their hard earned earnings but inherited wealth is not taxed. No wonder the rate of local taxes often seems so arbitrary and so high and so illogical (people paying different amounts for the same services) if there's now this big hole in the income tax system. It makes more sense to me to lower taxes on hard earned earnings and have inherited tax taxed than to have high taxes on earnings and an illogical set up for local taxes and not to have inherited wealth taxed.

But how exactly are tax havens set up? And how can one become resident in them? We hear a lot now about business people (men specifically) and their wives who have set up in tax havens but still seem to be able to live in Britain, so how is this done? It sounds as if, since we are said to be a democratic country, we should all be doing it!

Merrett1

Sasparillo

The capital you receive from the estate is not taxable and has never been taxable as income. Only inheritance tax is payable by the individual who has passed away on their estate.

Payments from estates are where the capital is waiting to be distributed to the beneficiaries of the will and it is sitting in a bank account accumulating interest. The interest is the income part that needs to be declared. Also happens for dividends received on shares whilst they are waiting to be distributed.

This is still on tax returns today. You should expect this to be declared to you on a R185 form by the executor if there is any.

On the other part you mentioned, tax havens are not set up they are just jurisdictions that have income tax rates lower than the UK. They are very hard to beneficial for the average joe as it takes a lot of tax planning to make them work for you. Especially if you are what is known as UK domiciled e.g. your mother and father come from the UK and you think yourself to be British.

Merrett1

gamston wrote:

guy can someone advise me on this
dad died this year left around 200K under IHT threshold,
we want the money go to the grandchildren, but their parents are going though a break up
he had a unit trust of £29K and a bond of £30K
if i option to sell the unit trust and I recieve the money £29K
and my sister recieves the £30K from the bond as Beneficiary
will we have to pay capital gains tax,??

my dad got these unit trusts, and bonds years ago, and has never maximised his capital gains them, (ie he brought them and kept them, he did not sell and buy back "bed & breakfast" every few years to ensure he did not go over the £7000 capital gains allowance)

Gamston

The shares you receive will be deemed to be acquired on the date of your father's death. This means that there will be a capital gain or loss in respect of the difference in price between now and your father's death. If the gain is greater than £8,800 then there may be capital gains tax to pay at your marginal rate of tax. If you broadly earn under £35,000 but over £7,000 you will pay 20% of the gain.

I can't answer the bond issue as there are lots of different types that have different tax consequences.