As a rule, there would be no tax to pay on anything inherited – at the time of inheriting it. But, there may be a need to pay:
- Capital Gains Tax after selling an inherited property or shares.
- Income Tax on profit ‘earned’ from an inheritance (e.g. receiving income from renting out a property).
- Inheritance Tax (sometimes called death duties).
In most cases, the funds from the estate of a person who dies would pay any liabilities. But, if the estate is unable (or fails) to pay Inheritance Tax, the person who inherits it may need to pay it instead.
Inheritance Tax may need paying on any gifts that the person gave to you during the seven (7) years before they died. Putting your inheritance into a trust may also be liable for taxes if the trust cannot (or does not) pay up.
Often, a deceased person’s will would instruct the Inheritance Tax payment to come out of your inherited assets. If so, taxes would get paid by the executor of the will or the administrator of the estate.
Note: HM Revenue and Customs will contact you if there are any liabilities of tax on property, money, or shares you inherit.
Inherited Money and Shares
There are only a few instances when you might have to pay tax on money and shares at the time of inheriting them.
Capital Gains Tax
There can be situations when you would need to pay Capital Gains Tax. Selling (or disposing of) inherited shares that increase in value since the person died would be one of them.
There may pay Income Tax liabilities on certain sources of income, such as:
- Dividends paid to you on shares that you inherit.
- Savings interest that you earn from money you have inherited.
There are some situations where you may have to pay Inheritance Tax on money and shares that you inherit. A typical example would be if the estate of the deceased person cannot (or does not) pay the duty.
HMRC calculate money or shares given to you by the person before they died as gifts. As such, there is a different set of rules for gifts and Inheritance Tax.
At the time of inheriting a property, you do not pay Stamp Duty, Capital Gains Tax, or Income Tax. But, you may have to pay Inheritance Tax (if the estate fails to pay it).
Note: HM Revenue and Customs will contact you if there are any liabilities of tax on property, money, or shares you inherit. The rules on Land and Buildings Transaction Tax differ in Scotland.
Selling a Property
Inheriting a property often means you would then own two (2) homes. If so, you would need to nominate one of them as being your main home.
Note: You must inform HMRC which one of the properties is your main home within two (2) years of inheriting it. If not, HMRC will decide which one was your main home when you sell it.
Renting out a Property
You may be liable for paying Income Tax (and National Insurance) if you are renting out your property.
Properties Held in Trust
As a rule, inheriting a property held in a trust means you would be the ‘beneficiary’. So, the legal owners are the trustees responsible for paying tax on income that the trust receives. But, you could still have to pay tax on any income that you get from the trust.
A ‘bare trust’ would be one where you are the beneficiary and the legal owner. As such, you would be responsible for paying tax on any income that the trust receives.
Note: A trust is a way of controlling and managing assets for people (e.g. money, investments, properties). You can read more about the way they get taxed in the trusts and taxation UK guide.
Joint Property, Shares, and Bank Accounts
As a rule, if you inherit property, shares, or money (shared in a joint bank account with the deceased), you would not have to pay any tax or Stamp Duty.
Death duties may be due. The amount you pay would depend on how you owned the property or the shares. The way that the bank accounts were set up can also influence your tax liabilities.
You would be ‘joint tenants’ if you and the deceased person owned the assets ‘jointly’. The term used in Scotland is ‘joint owners’.
You would be ‘tenants in common’ if you each owned a part of the assets. The term used in Scotland is ‘tenants in common’ and ‘coparceners’ in Northern Ireland.
Note: The money, shares, or the property might be half for each partner or it could be an agreed percentage. The bank should be able to confirm how the money got divided in the account(s).
As joint tenants, you would inherit anything you owned through an automatic process. But, you may have to pay Inheritance Tax if:
- The whole of the estate of the deceased person (money, property, and personal possessions) is worth more than the current Inheritance Tax threshold (and);
- The deceased person’s estate cannot (or does not) pay the bill.
Tenants in Common
Inheritance Tax may be due on the deceased person’s share of the money in bank accounts, property, or shares if:
But, the executor (or administrator of the estate) should pay the bill out of the estate if the deceased left you their share of the money, property, or shares in their will.
Even so, you would have to pay it if the estate cannot cover the tax on the deceased person’s share of the assets. The same would apply if the executor does not pay. It may force you to sell the property or shares to pay the tax along with any other debts.
Note: You may also need to update property records at the Land Registry about the death of one of the property owners.
Capital Gains Tax and Income Tax
Other taxes may be liable on anything that you earn (or profits you make) from bank savings interest, property, or share dividends.