How to avoid paying tax on an inheritance

Si_Clist

To our considerable surprise, my wife and I have learned that she stands to inherit something in the region of £100K shortly.  We currently live on my State pension and Pension Credit, and have not paid tax since I had to stop working 10 years ago.

Obviously we will come off Pension Credit once this windfall is actually in the bank, but how do we avoid having to pay tax?  Do we get one of those ISA things, whatever they are?  Or what?

We really haven't a clue!  Is there perhaps a website somewhere that might clarify things for us?

eskbanker

The best approach will generally be to maximise net return on the money rather than trying to avoid tax as such, as these sometimes give different answers, but as it happens, cash ISA rates are good at the moment.

Much will depend on when you anticipate using the money, but you might find it useful to follow this as a starting point for what to do with a lump sum:

The Flowchart - UKPersonalFinance Wiki

Si_Clist

Thank you!  We don't anticipate having a particular need to use more than say £20K over the next year or so.

tacpot12

You are not going to be able to avoid paying tax completely. 

You and your wife have ISA allowances of £20,000 each. So this year, you can put £40,000 into ISAs. 

The following year, you can put another £40,000 into ISAs, and the year after that you can put the rest into an ISA. So within three years, you can get it into ISAs and you will then be paying no tax.

But before all the money is in an ISA, if it is earning interest or dividends, you may need to pay tax on it.

There are allowances that can help reduce the tax bill and you shouldn't need to register for Self-Assessment either, but you will need to tell HMRC if you receive interest or dividends that are more than your allowance.

The gov.uk website confirms what you will need to do about tax, and there is lots of advice on MSE about chosing ISA and taxable savings accounts that pay good rates of interest.  

eskbanker

tacpot12 said:

You are not going to be able to avoid paying tax completely.

I disagree!  £5K of interest income for a couple of low earners ("We currently live on my State pension and Pension Credit, and have not paid tax since I had to stop working 10 years ago") is highly likely to fit comfortably within the savings allowances, resulting in no tax being payable....

tacpot12

eskbanker said:

tacpot12 said:

You are not going to be able to avoid paying tax completely.

I disagree!  £5K of interest income for a couple of low earners ("We currently live on my State pension and Pension Credit, and have not paid tax since I had to stop working 10 years ago") is highly likely to fit comfortably within the savings allowances, resulting in no tax being payable....

Yes, I was rushing my reply and didn't factor in two savings allowances. 

Keep_pedalling

Does your wife have no income at all? If not she could earn up to £18,570 of interest using the starting savings rate and personal savings rate, which is way over what you can get from £100k of savings. 

https://www.gov.uk/apply-tax-free-interest-on-savings

Bostonerimus1

To be clear you won't pay any inheritance tax, that has to be paid by the estate of the person who has died.

When you have the lump sum you won't have to pay any tax on that and you can use the various tax free allowances on any dividends, interest and capital gains that it earns. To avoid tax entirely put as much as you can as fast as you can into ISAs.

ZeroSum

If you are the sole beneficiary then there's no inheritance tax. If there's others & the estate is worth a lot more there may be something to pay.

If you're both only on state pension & no other private or works pensions then you'll qualify for the starter rate for income from interest on savings of £5,000 each

£100k will generate just under that, so probably don't even need to divvy it up.
Although I probably would anyway as there's half a chance HMRC could make a mistake. You also need to consider that you're protected for £85k each should bank go bust which is another reason for splitting into each other's names & different banks etc

However, current allowances may change in the future, so whilst currently you may not need an ISA, it's probably worth putting it into an ISA

jimjames

Si_Clist said:

Obviously we will come off Pension Credit once this windfall is actually in the bank, but how do we avoid having to pay tax?  Do we get one of those ISA things, whatever they are?  Or what? us?

You don't pay any tax on an inheritance, IHT is paid by the estate. You might pay tax on the income you earn from it but since you can get £80k of it into ISAs within the next 2 months that really shouldn't be a problem either. 

Albermarle

Si_Clist said:

To our considerable surprise, my wife and I have learned that she stands to inherit something in the region of £100K shortly.  We currently live on my State pension and Pension Credit, and have not paid tax since I had to stop working 10 years ago.

Obviously we will come off Pension Credit once this windfall is actually in the bank, what is the best place(s) to save/invest the money to get the best value from it, but how do we avoid having to pay tax?  Do we get one of those ISA things, whatever they are?  Or what?

We really haven't a clue!  Is there perhaps a website somewhere that might clarify things for us?

I just changed your question to reflect some of the comments .

There is a phrase often used in these forums ' Do not let the tax tail wag the investment dog'
In English it means do not make bad decisions based on making avoiding tax the priority.

Is there perhaps a website somewhere that might clarify things for us?

Yes this one. If you go to the main MSE website you will see sections on saving etc. Plus reading through this and the ISA sub forum would be helpful.