Tax on inheritance - confused!

heleha

Hello everyone,

I've just had a confusing conversation with someone from HMRC.

I am self employed and am just filing my first self-assessment online. I wanted to check whether the £3700 I received from my grandmother in her will in the relevant tax year would be liable to any tax.

The money came from a large estate, and all inheritance tax was (I am told) paid. The remainder of the estate was then distributed as per the will.

The guy from HMRC has told me I am liable for income tax on any amount of inheritance over £3000 (so £700 in this case.)

I also just spoke to my mother's accountant, who said that as all tax on the estate had been paid before the money was distributed, none of it is taxable again.

I am now quite confused! Who is right?? It may not be a huge amount to be taxed on, but I would like to get it cleared up all the same!

Thanks in advance for your help.

mrschaucer

Are you sure that's what the HMRC person said? As far as I know, you would only be liable for tax on any INTEREST you get from an inheritance amount.

Mikeyorks

The accountant is.

Not sure how you explained it to HMRC ...... but the answer given to the question you've phrased here is completely wrong.

heleha

Thanks very much both.

Hmmm - I told the HMRC person I'd inherited the money from my grandmother's estate, that was it. Maybe I should have explained to him that it had already been taxed (though you might also suppose he would have asked me this!)

He did have to leave me on hold for a considerable time to 'ask a colleague'(?)

He's obviously got his regulations confused, or somehow we got crossed wires.

Thanks lots again anyway.

CLAPTON

absolutely no tax to pay

IHT if applicable, is paid from the estate before the beneficiaries receive anything

and no need to mention it on your SE tax form

antonic

http://www.hmrc.gov.uk/inheritancetax/index.htm

There is an annual amount of £3000 which can be gifted to anyone tax free per year.

This maybe where he was getting confused.

Hope this helps.

Mikeyorks

heleha wrote: »

He's obviously got his regulations confused, or somehow we got crossed wires.

Too kind. I'd settle that he's an idiot. Which you don't expect on help lines.

John_Pierpoint

CLAPTON wrote: »

absolutely no tax to pay

IHT if applicable, is paid from the estate before the beneficiaries receive anything

and no need to mention it on your SE tax form

The executor should have explained what the payment was.
If you have been paid within 12 months of the death and you are not the residual beneficiary of the estate (ie the will says something like "I leave the sum of £50K to my grandchildren in equal shares" and there are 5 such grandchildren (or orphaned great grandchildren the children of one of the 5 who has died) then your share would have been £10k of capital. That capital would have had its share of IHT paid by the estate, out of the residuary in normal circumstances. [Unfortunately, most wills fail to define how the un-named extra beneficiary called HMRC is to be paid, if the estate qualifies for IHT].

However if you are paid later than 12 months - which you well might have been if there has been a lot of to-ing and fro-wing in an attempt to pay HMRC on time, and stop "Hector" demanding interest after waiting only 6 months, - then your £10k should have started earning interest.

The executor will have paid the 20% standard rate of tax on the interest within the trust he is running while he retains the funds.
In this case your payment should clearly show what is capital and, on a form R185, what is income and how much tax has been paid.

http://search2.hmrc.gov.uk/kb5/hmrc/forms/view.page?record=6hW2AsyzoO0&formid=3172

If you are subject to higher rates of tax at 30% 40% or 50% then you will be expected to keep HMRC abreast of your extra income.

The above is a slightly simplified explanation of what is going on - it assumes you are over the age of 18, living and paying tax in the UK, probably at the margin a standard rate tax payer, and you have been left a specific bequest/legacy and any assets of the estate the estate, needing to be sold to generate the cash, have been sold as assets of the trust not assigned to you personally and then sold.

Unfortunately when the relationship of executor and beneficiary becomes a triangle of executor, first beneficiary(HMRC) and then ordinary beneficiaries, there may be extra complexities.

You would need to give us more details.

heleha

Ok, so I received the unexpected cheque in the post nearly two years after my grandmother had passed away, along with a letter of acknowledgment to sign and return; a copy of the 'Final Administration and Distribution Account in the Estate of (my grandmother)'; and a copy of the will.

The section of the will detailing my (and the other grand and great-grand children's) inheritance said:

'I GIVE subject to payments of my debts, funeral expenses and testamentary expenses and all taxes and duties (if any) and the legacies given by my Will and Codicil all my estate ('my residuary estate') to my Trustees to divide the same into 100 equal shares which they shall distribute as follows:

Each of the following persons shall receive 1.3 shares (with a maximum of £5000)....'

I paid the cheque in, and signed and returned the acknowledgment letter, within a week of receiving them. It was from a legal firm who one would assume would have dealt with any tax or accruing interest due on the estate while it was under their control. My cousin's husband was the executor, and he has worked in financial services for a long time (not always a recommendation these days, but one would assume that would make him capable in these circumstances.)

There was, I have just discovered from looking at the will, no inheritance tax to pay on the estate of just over £300,000. I am just about earning enough to pay 20% tax on a small proportion of my earnings, and the money has certainly not had time to accrue any interest since I received it!

Do I need to try to clarify this with the executor, and/ask them for a copy of the form R185?

Crikey, I thought this was going to be the most straightforward bit of income I'd had all year!

Also, I am inclined to agree with the comment above about the HMRC helpline man being totally useless - how can they get away with being so incompetent?!

Thanks once more for all your help, everyone.

John_Pierpoint

You have the accounts and the will so you should be able to see what went where.
How much did the estate earn as income during the 2 years?
Was any income generated by assets that paid, without the standard 20% tax deducted?
Possibly some share dividends but significantly rents from property?
If the income producing asset was cash, the last two years have seen miserably small returns.
Does the will say who gets to keep the income during the period of administration?
(The solicitor who charged to do the paperwork?? - I think that should have been charged against the crystallised capital of the estate??)

What other bequests are there ? (payment of income for life to some elderly survivor?)

My bet is that your payout is all capital and not income and it appears to be a maximum of about £3,900 as it is shared out in roughly 76ths ?!?.
You have a share of the residuary not a specific bequest, the residuary beneficiaries get (their share of) what is left after the specific legacies have been paid. By definition the residuary cannot be defined until every other beneficiary has been paid.
Had the executor sorted out the estate himself, he would only have been able to claim legitimate expenses not fees, unless the will had a clause giving him a bequest if he did the job.

I think the message is bank the cheque, even if it includes an element of income that extra income will not change your marginal 20% rate of tax, after you have understood the will and accounts; any tax mistakes with the standard rate of tax will be the responsibility of the executor.

If you have any misgivings ask the executor to explain (calmly and nicely please.:D), it is a lonely job.

[On a personal note I have recently administered a relative's will with a similar (unusual) clause that left the residuary to be divided between a list of named relatives BUT the solicitor who had written the will had forgotten to add the magic words "being alive at my death" and the relatives who had died since the will was written were not descendants of the testator (the person who had died). This made the will "partially intestate" and those sums of money had to be distributed according to the laws of intestacy.]

John.

PS I am assuming that the estate is not in Scotland (the terminology and procedures are slightly different north of the border - different legal system).
I also notice that you have a self employed business with low profits [like me]; presumably you are already going through the annual treadmill of self assessment. Presumably you have an account you use for your business transactions and you "legacy" has not been passed through your business account.
As your circumstances are such that you have to account for every scrap of income; it would have been nice if the executor had given your position a bit of thought and so been able to put your mind at rest before sending the unexpected cheque.
It is almost certain that the cheque you have received has no effect on your Self Assessment return - had it been (say) £250k it probably would have generated significant "trust" income to which you could well have been entitled and which you would then have had to report.
[The various beneficiaries of the will for which I was executor got their interest as a separate cheque complete with the R185,
I had a distinct feeling that some of them had not a clue what was going on in spite of my efforts to explain; especially so a pensioner in her 80's, who could well have been a 30% tax payer.]