Tax on inheritance

lilab_2

Hi. Can anyone help me on tax where the residue is inherited?

The estate is not liable to any inheritance tax. I have been left firstly a legacy and then secondly a proportion of the residue. Will I have to pay any income tax?

It is a fairly straightforward case with the only asset being a house which is being sold. From the proceeds I am to be given a specific sum and the residue after bills to be split with my sister.

There is no source of income from the estate, stocks shares etc. so once the house is sold that is pretty much that.

Thanks for any help and advice

John_Pierpoint

To simplify the basic rules:
When someone dies, leaving a will, their executor as trustee becomes the owner of the assets and liabilities they leave.
InHeritance Tax (IHT) is a tax on the capital (net worth of the deceased) at 40%. IHT has a nil rate band of £325k (£650k for a couple on second death if the first death left everything to the surviving spouse). At death it is 40% IHT that is charged not 18 or 28% Capital Gains Tax (CGT).
This capital passes to the beneficiaries and is then theirs to use as they see fit. There is a chance that some of this capital will manage to earn interest while still in the hands of the executor.
Usually such income pays standard rate tax while in the hands of the executor. The beneficiary should receive the net sum together a certificate R185 showing the tax deducted.

There is also the possibility that the property has gone up in value since the death, and so a liability to pay CGT exists.
This CGT may be a liability for the executor to pay or it may be for the beneficiaries to pay, depending on how the executor has arranged things. [People have a CGT £10,600 nil rate band, double that available to a trust,]

So with house prices largely stagnant, you will most likely receive a cheque that is yours to spend as you see fit.

lilab_2

Thanks John_Pierpoint for your reply.

CGT doesn't apply to this as mum was selling her house before she died and the buyers have hung on and the sale price remains the same.

It was more the tax on the inheritance - not inheritance tax, which we won't have to pay as we have claimed the double allowance (step-dad died six months earlier).

I just wasn't clear about tax due on the residue, but it makes sense that it applies to any interest earned.

Thank you again

diamond_dave

Brilliant, thanks for that valuable info, I've been struggling with the concept of the R185 for ages and now I understand what happens(I think) Am I correct in thinking that the income earned from the estate whilst in the hands of the executor is the amount less tax that is added to this form and sent to the beneficiaries?

bobthedambuilder

To put it even simpler than Mr Pierpoint, what you have inherited is a bequest or gift. You have no liability for income tax, as a gift is not treated as income.

If that gift pushes your total net value up higher than the IHT threshold, your estate will have a liability to IHT after you've gone, so you may want to consider how to deal with that future eventuality in the interests of your heirs.

John_Pierpoint

diamond_dave wrote: »

Brilliant, thanks for that valuable info, I've been struggling with the concept of the R185 for ages and now I understand what happens(I think) Am I correct in thinking that the income earned from the estate whilst in the hands of the executor is the amount less tax that is added to this form and sent to the beneficiaries?

Yes you have got the idea:
The estate from the date of death is a trust with the executor/administrator as trustee. It earns income and pays standard rate tax on it - it also gets a half a person nil rate allowance for Capital Gains Tax. It is a good idea to pay out such income to the beneficiaries with an eye on the end of each tax year (5th April) to avoid bunching of this income at the end of the administration and creating potential higher rate liabilities for the beneficiaries.

lilab_2

Now you've confused me again.

I thought that I had understood you. If I use say £10000 as an example.

If £10,000 is in the hands of the executors/adminstrators and it earns interest, then that interest must be declared as income and tax paid on it?

Who pays the tax? The executors from the estate?

Or do the beneficiaries declare the interest as income and then pay it on their tax return.

For argument's sake (I know the figures wouldn't be correct, but trying to get my brain around it) Let's assume 50/50 split between two.

£10k in account
Earns £1k in interest
Tax due £100

Do the executors -

a) Pay £5500 to each of the beneficiaries, complete form for each and they are then liable to pay the tax?

or

b) Pay £5450 to each and settle direct with HMRC the tax liability and give each a copy of the form?

Sorry to ask again, but I want to be sure I am doing the right thing.

xylophone

Presumably the money from the sale of the house will be credited to an executor's current account - I would be very surprised if any interest were paid on this but if there were see https://forums.moneysavingexpert.com/discussion/452887

The executor would pay all bequests, bills etc from this account.
In the circumstances you describe, you will receive your specific legacy and share of the residue free of tax - if you then earn income because you have invested the money it will be dealt with according to your individual tax situation.

You say that the house was the only asset of the estate which while possible seems a little odd - were there no bank/building society accounts?

If there were, this might be relevant. http://www.hmrc.gov.uk/tdsi/deceased.htm

lilab_2

There was a small amount in a standard current account which was not earning any interest. As probate had been granted this has now been transferred to the executors account so that we can begin to settle bills. The executors account doesn't pay interest. The proceeds of the house sale will go to this account and then be distributed. We don't expect it to be there for long so any interest earned would be minimal. But my question referred to this interest - if any. Who pays the tax whilst it is still with the executors or do the beneficiaries of the residual estate receive all and then pay tax on interest earned as normal? If the latter I don't understand the need for the form.

xylophone

No interest is being paid on the executor's account.
If there were, see post 2 in first link in my previous post.

lilab_2

I have sorted it all out now. Thanks to all of you for you replies. There is no need for me to complete the form - HMRC very helpful with all inheritance and probate questions.