Inheritance and income tax

amysquie

I have received a portion of an inheritance and there is no inheritance tax to pay. I will be getting more as and when we sell a house. My question is, how does HMRC know not to tax this as income? If classed as income it will take me well into the 40% income tax bracket. I am going to use my ISA allowance this year and in the next tax year etc with regard to the interest but what will the taxman do when he sees this amount suddenly deposited into my account? 

Thanks for your help

Flugelhorn

Nothing.

they won't see it as income .. because  it isn't income! HMRC are informed by employers of income you earn and inheritance doesn't come into that 

Savvy_Sue

Plus, even if you had to do self-assessment, this wouldn't be taxable income, just as it wouldn't be taxable income if the dear departed had made you a gift of this amount before they died. 

Notepad_Phil

Savvy_Sue said:

Plus, even if you had to do self-assessment, this wouldn't be taxable income, just as it wouldn't be taxable income if the dear departed had made you a gift of this amount before they died. 

Not to worry anyone, but I believe that depends on whether any part of the bequest included any share of the interest/dividends that came into the estate.

If it was a specific sum e.g. "I leave £10,000 to each of my nieces" then I believe that's fine, but if you received a percentage of the final estate e.g. "I leave everything to my 3 daughters" then you may have to disclose the portions of interest and dividends that were included in your share of the estate income. So not the entire inheritance, just the amounts from the estate interest and dividends.

Have a look at https://www.litrg.org.uk/tax-nic/trusts-and-estates/bereavement-tax-issues-death/tax-income-and-gains-after-death

and https://www.litrg.org.uk/tax-nic/trusts-and-estates/paying-tax-trust-and-estate-income

For most people it won't be a problem, but if the administrator(s) of the estate have provided a R185 form (which they are meant to do if there has been any tax paid on estate interest/dividends) then there could be extra tax to pay if you're a higher rate tax payer, or if you're close to higher rate bands then it could tip you over into being a higher rate tax payer, and so have to pay additional tax on the estate income.

On the other hand if you're not a tax payer then you could get a refund of the tax oaid by the estate.

pjs493

Just be aware of how much interest you make on any non-ISA savings. If you go over the allowance you pay have to do a self assessment and pay tax on the interest you’ve earned. 

Savvy_Sue

Notepad_Phil said:

Savvy_Sue said:

Plus, even if you had to do self-assessment, this wouldn't be taxable income, just as it wouldn't be taxable income if the dear departed had made you a gift of this amount before they died. 

Not to worry anyone, but I believe that depends on whether any part of the bequest included any share of the interest/dividends that came into the estate.

If it was a specific sum e.g. "I leave £10,000 to each of my nieces" then I believe that's fine, but if you received a percentage of the final estate e.g. "I leave everything to my 3 daughters" then you may have to disclose the portions of interest and dividends that were included in your share of the estate income. So not the entire inheritance, just the amounts from the estate interest and dividends.

Have a look at https://www.litrg.org.uk/tax-nic/trusts-and-estates/bereavement-tax-issues-death/tax-income-and-gains-after-death

and https://www.litrg.org.uk/tax-nic/trusts-and-estates/paying-tax-trust-and-estate-income

For most people it won't be a problem, but if the administrator(s) of the estate have provided a R185 form (which they are meant to do if there has been any tax paid on estate interest/dividends) then there could be extra tax to pay if you're a higher rate tax payer, or if you're close to higher rate bands then it could tip you over into being a higher rate tax payer, and so have to pay additional tax on the estate income.

On the other hand if you're not a tax payer then you could get a refund of the tax oaid by the estate.

Ah yes, I seem to remember having to do such certificates for sums less than £5 for each of my siblings ... and because the administration fell into two tax years, that was double the work ... 

pjs493 said:

Just be aware of how much interest you make on any non-ISA savings. If you go over the allowance you pay have to do a self assessment and pay tax on the interest you’ve earned. 

Yes, but that is a separate issue which the OP is aware of. HMRC neither know nor care about the gift itself, and the OP's taxable income will remain under the £40k limit, so they've still got the higher amount for interest they can earn. And, should they breach that limit, it's only the interest that HMRC are interested in, not the amount of the actual bequest.