Do I Have to Inform HMRC If I Inherit Money in the UK?

Inheriting money or property can be a significant life event, but unfortunately it will normally mean a bereavement so can be a testing and difficult time. There will be many things you need to resolve which will also raise questions about tax obligations and reporting requirements to HM Revenue and Customs (HMRC). 

In this guide, we will explain whether you have to inform HMRC if you inherit money, and whether inheritance money is declared as income in the UK. This includes tax thresholds, inheritance tax considerations, reporting to universal credit, and strategies to manage capital gains tax on inherited property.

So, if you find yourself with an inheritance nest egg but no idea whether you need to inform HMRC or are even liable to inheritance tax, here’s the simple answer: 

No, you do not need to inform HMRC directly when you inherit money. It is usually the responsibility of the executor or administrator of the deceased’s estate to settle any Inheritance Tax (IHT) due with HM Revenue & Customs (HMRC) before distributing the assets to the beneficiaries.

However, you should ensure that any tax liabilities associated with the inheritance, such as income tax or inheritance tax, are appropriately addressed and reported to HMRC through self-assessment tax returns or other applicable forms.

So, the short answer is no, you do not have to inform HMRC if you inherit money in the UK but there are many other considerations when dealing with inheritance in the UK. We have covered various scenarios below to help you understand what to do when transferring money from a business account to a personal account.

How much money can you inherit before you have to pay taxes on it in the UK?

In the UK, inheritance itself is not subject to income tax. However, if you inherit a substantial amount of money, any income generated from it, such as interest or dividends, may be subject to income tax. Additionally, if the total value of the estate exceeds the inheritance tax threshold, inheritance tax may apply.

Inheritance tax (IHT) is levied on the estate (the total value of the money and property) of someone who has died, rather than directly on the amount inherited by an individual. There are several factors to consider when determining how much inheritance tax might be owed:

The standard Inheritance Tax threshold (or nil-rate band) is £325,000. If the total value of the estate is below this threshold, no inheritance tax is owed. However, if the estate’s total value exceeds this amount, the excess is generally taxed at 40%. That hurts. You spend your whole life working, paying tax on your income to build a nest egg and then bam when you want to pass on that wealth the UK Government just keeps on taking.

If a deceased person’s spouse or civil partner did not use all of their nil-rate band, the unused portion can be transferred to the surviving spouse or civil partner when they die. This means that it’s possible for the surviving spouse or civil partner to have a nil-rate band of up to £650,000 (2 x £325,000).

An additional allowance, called the Residence Nil-Rate Band (RNRB), was introduced to make it easier to pass on the family home to direct descendants without an IHT charge. The RNRB is £175,000. This is on top of the standard nil-rate band, potentially bringing the total IHT-free estate value to £500,000 for an individual or £1 million for a couple.

Gifts given within the last 7 years before death might be subject to IHT depending on when they were given and their value. There are also certain exemptions and allowances for gifts.

It’s worth noting that the executor or administrator of the estate usually pays the IHT using the funds from the estate. The beneficiaries (the people who inherit the estate) do not usually pay tax on the things they inherit.

If the estate is left to a spouse or civil partner, a UK-based charity, or certain other organisations, there’s normally no Inheritance Tax to pay.

Given the complexities of inheritance tax, including potential changes in the law or allowances, it’s advisable to seek advice from a tax professional or solicitor familiar with UK IHT regulations if you’re dealing with an estate or planning your own estate.

How do I inform HMRC if I inherit money in the UK?

In most cases, you do not need to inform HMRC directly when you inherit money. However, you should ensure that any tax liabilities associated with the inheritance, such as income tax or inheritance tax, are appropriately addressed and reported to HMRC through self-assessment tax returns or other applicable forms.

In the UK, if you inherit money, it is usually the responsibility of the executor or administrator of the deceased’s estate to settle any Inheritance Tax (IHT) due with HM Revenue & Customs (HMRC) before distributing the assets to the beneficiaries. 

Thus, as a beneficiary, you generally don’t need to notify HMRC about the inheritance you receive, and you also don’t pay tax on the inherited amount as that has already been dealt with by the executor.

If you’re unsure about any tax implications related to your inheritance, or if you believe you need to report something to HMRC, it’s advisable to seek advice from a tax professional or solicitor who can provide guidance tailored to your specific situation.

Does HMRC check inheritance tax?

Yes, HMRC has the authority to investigate and review inheritance tax matters. When an individual passes away, the executors or administrators of the estate are responsible for assessing and paying any inheritance tax due. HMRC may conduct checks and audits to ensure compliance with inheritance tax regulations. This is done to ensure that the correct amount of tax has been calculated and paid, and to prevent fraud or incorrect submissions.

Here’s how HMRC can scrutinise IHT:

HMRC will review the IHT account forms (like the IHT400 and its accompanying schedules) submitted by the executor or administrator. They may request additional information, documentation, or clarification on particular entries if something is not clear.

One of the critical aspects of IHT calculations is the valuation of the deceased’s estate, including property, shares, and other assets. HMRC has teams of valuation experts, including those who specialise in valuing property and shares. They can query and challenge valuations if they believe they’re inaccurate.

HMRC can obtain information from third parties, such as banks, financial institutions, or other agencies, to cross-check the data provided in IHT forms.

HMRC can look into gifts given away by the deceased in the seven years before death, which might still be liable for IHT. They might request evidence or information about such gifts if they believe some have not been declared.

Apart from investigations triggered by discrepancies or under valuations, HMRC might also conduct random checks on IHT submissions as a part of their routine compliance and auditing processes.

If inaccuracies are found in the IHT account, whether due to errors or deliberate attempts at fraud, HMRC can impose penalties. The severity of the penalty often depends on the nature of the error and whether it was made despite taking reasonable care.

Given the potential scrutiny by HMRC and the complexities involved in valuing assets and calculating IHT, many executors and administrators opt to get professional assistance from solicitors, tax advisors, or accountants who are experienced in IHT matters. This can help ensure that the IHT account is accurate and complete, and that the correct amount of tax is paid.

What happens if I don’t declare inheritance?

If you fail to declare an inheritance that is subject to taxation, such as inheritance tax or income tax on any generated income, it can result in penalties, fines, or legal consequences. It is essential to understand and fulfil your tax obligations to HMRC to avoid potential complications.

If you don’t declare inheritance when required, there can be several consequences, the potential implications in the UK:

Penalties and interest: The executor or administrator of an estate is primarily responsible for settling any Inheritance Tax (IHT) due with HM Revenue & Customs (HMRC) before distributing the estate to the beneficiaries. If IHT is not properly declared and paid:

• HMRC can impose penalties on top of the tax owed if they find that IHT has been underpaid. The severity of the penalty often depends on the nature of the error, whether it was deliberate, and how soon the mistake was rectified.
• HMRC will usually charge interest on any unpaid tax from the date it was due.

Investigations: HMRC has the authority to investigate estates and inheritances. They can query and challenge valuations, request additional documentation, and cross-check information with third parties such as banks. If discrepancies are found, it can lead to a full investigation, which can be time-consuming and stressful.

Beyond tax implications, deliberately hiding or not declaring an inheritance could be viewed as fraud, which can have legal repercussions, there’s also a reputational risk. Being involved in a tax evasion or fraud case can harm personal and professional reputations.

If you suspect that an inheritance hasn’t been declared correctly, whether due to an oversight or a deliberate act, it’s essential to seek legal and financial advice as soon as possible. Taking proactive steps can help mitigate potential penalties and other consequences. Always consult with a tax professional or solicitor familiar with inheritance issues to ensure compliance with all applicable laws and regulations.

If I inherit money, is it taxable in the UK?

In the UK, money you inherit is not typically considered taxable income, and you do not have to pay Income Tax on the inherited amount itself. However, there are several points to understand when it comes to inheritance and if the money you inherit is taxable in the UK:

• Inheritance Tax (IHT): The estate of the person who has died may be liable to pay Inheritance Tax if it’s over a certain threshold. The executor or administrator of the deceased’s estate is responsible for working out if Inheritance Tax is due and ensuring it’s paid to HM Revenue & Customs (HMRC). This tax is paid out of the estate before any distributions to beneficiaries. As a beneficiary, the money or assets you receive will typically be after any IHT has been settled.
• Income Generated from Inheritance: While the inheritance itself is not taxed, any income you subsequently earn from the inherited amount (for example, interest on savings or dividends from shares) is considered taxable income and may be subject to Income Tax.
• Capital Gains Tax (CGT): If you inherit assets like property or shares and later sell them, you may be liable to pay Capital Gains Tax on any increase in value from the time you inherited them to when you sold them.
• Gifts Received Prior to Death: If you received a significant gift from the deceased within seven years before their death, it might be counted as part of their estate for IHT purposes. If the estate owes IHT because of this gift, in some cases, the recipient of the gift might have to pay some or all of the tax due. This is particularly the case if the estate does not have enough assets to cover the IHT bill.
• Estate Income: Sometimes, between the date of death and when the estate is settled, the estate might earn income (e.g., rent from a property or dividends). This income might be subject to Income Tax, which would typically be managed by the executor or administrator. If this income is then distributed to beneficiaries, there might be additional tax implications.

It’s always a good idea to consult a tax advisor or solicitor if you inherit money or assets to ensure you understand any tax obligations and can plan accordingly.

FAQs on inheriting money and declaring to HMRC in the UK

Inheriting a house from your parents in the UK

Inheriting a house from your parents may have various tax implications. If the value of the estate exceeds the inheritance tax threshold, inheritance tax may be due. However, there are exemptions and reliefs available, such as the “main residence nil-rate band,” which can help reduce or eliminate inheritance tax on the family home.

Inheriting a house from your parents in the UK comes with several considerations, primarily related to taxes and property ownership. Here are some key points you should be aware of:

Inheritance tax is usually paid from the estate’s assets.

• The standard IHT threshold (nil-rate band) is £325,000 per person. If a deceased person’s spouse or civil partner did not use all of their nil-rate band, the unused portion can be transferred, potentially doubling the threshold.
• Additionally, there’s the Residence Nil-Rate Band (RNRB), which provides an additional allowance when a main residence is passed to direct descendants, such as children or grandchildren.

While you won’t pay CGT when you initially inherit the property, it’s essential to be aware of this if you later decide to sell. The base cost for CGT purposes will typically be the market value of the property at the time of inheritance. If you sell the house for more than its inherited value, you might be liable for CGT on the profit.

If you decide to rent out the inherited property, you’ll need to declare the rental income to HM Revenue & Customs (HMRC) and might need to pay Income Tax on the profit after allowable expenses.

If you decide to move into the inherited house and it becomes your primary residence, and you later sell it, you may be entitled to Private Residence Relief, which can reduce or eliminate any CGT liability.

The legal process of dealing with someone’s estate after their death is called probate. Once probate is granted, the property can be legally transferred to the beneficiaries. You might need to update the Land Registry details to reflect the change in ownership.

Do you pay capital gains tax on inheritance in the UK?

In most cases, inheriting assets, including property, is not subject to capital gains tax (CGT) at the time of inheritance. However, if you later sell or dispose of the inherited property, CGT may apply based on the increase in value between the date of inheritance and the date of sale.

Let’s walk through a fictional example of how Capital Gains Tax (CGT) might apply to an inherited property in the UK.

Alex inherits a house from his late mother in 2023. At the time of her passing, the market value of the house (which determines Alex’s acquisition cost for CGT purposes) is £300,000. In 2025, Alex decides to sell the property. By this time, the property’s value has risen to £375,000. Alex also incurs costs of £5,000 for legal fees and estate agent fees associated with the sale.

Determine the Gain

•  Sale Price: £375,000
• Minus Acquisition Cost (value at the time of inheritance): £300,000
• = Gross Gain: £75,000

Deduct Allowable Costs

• Gross Gain: £75,000
• Minus Sale Costs (legal fees, estate agent fees, etc.): £5,000
• = Net Gain: £70,000

Use the Annual Exemption

For this example, let’s assume the annual tax-free allowance for capital gains in 2025 remains at the 2023/2024 level of £6,000.   

• Net Gain: £70,000
• Minus CGT Allowance: £6,000
• = Taxable Gain: £64,000

Calculate CGT Due

The rate of CGT Alex pays depends on his taxable income for the year, as well as whether the property counts as a residential property for tax purposes. Let’s assume Alex is a higher-rate taxpayer in 2025, and the property is residential. The CGT rate for residential property for higher-rate taxpayers in 2023/2024 was 28% (note: rates can change).

• Taxable Gain: £64,000
• Multiplied by CGT Rate (28%): £17,920

Based on this example and these assumptions, Alex would have a capital gains tax liability of £17,920 upon the sale of the inherited property.

It’s worth noting that various factors can impact CGT, such as additional reliefs, other deductibles, or changes in tax regulations. Always consult with a tax professional or financial advisor when working on actual scenarios.

Remember, while Inheritance Tax (IHT) might be due on the deceased’s estate before assets are distributed to beneficiaries, CGT specifically concerns the change in the value of an asset from the time of inheritance to the time of disposal.

Always consult with a tax professional or financial advisor when dealing with inheritances and potential tax implications to ensure compliance and make informed decisions.

Do I have to declare inheritance to universal credit?

In the UK, if you’re receiving Universal Credit (UC) and you inherit money or assets, you must report the change in circumstances to the Department for Work and Pensions (DWP). Not declaring changes can lead to overpayments, which you might have to pay back, or potential penalties.

Here’s how an inheritance might affect your Universal Credit:

• Capital Limits – if you have savings or capital over £6,000, it can affect the amount of Universal Credit you receive. If you have £16,000 or more in savings or capital, you usually won’t be eligible for Universal Credit at all.
• Monthly Tariff Income – if you have between £6,000 and £16,000 in savings or capital, the DWP assumes you have a monthly ‘tariff income’ from these savings. For every £250 (or part thereof) you have over £6,000, it’s treated as though you have an additional £4.35 monthly income, which can reduce your Universal Credit payment.
• Inherited property – if you inherit a property but don’t live in it, it may be treated as capital after a certain period, potentially affecting your Universal Credit claim. However, there are some circumstances where the value of the property might be disregarded for a time, such as if you’re trying to sell it.

If your inheritance takes you over the capital limits or affects the assumed tariff income, this can reduce your Universal Credit payment or stop it altogether, depending on the amount.

It’s essential to report any changes in your circumstances, such as an inheritance, as soon as possible to avoid potential overpayments or penalties.

If you’re unsure about how an inheritance might affect your benefits or what you need to report, you might want to seek advice from a welfare benefits advisor or another knowledgeable source. They can provide guidance tailored to your specific situation.

How to avoid capital gains tax on inherited property in the UK?

To manage capital gains tax on inherited property, one option is to use the “no gain, no loss” rule. This means that if you inherit a property and subsequently sell it, you may be able to use the property’s market value at the date of inheritance as the cost base for CGT calculations, potentially reducing or eliminating any taxable gain.

Avoiding or mitigating Capital Gains Tax (CGT) on inherited property in the UK is a common concern. While it’s crucial to act within the boundaries of the law and seek professional advice, here are several strategies and considerations that may help:

1. Private Residence Relief: If you inherit a property and live in it as your primary residence for the entire time you own it, you may qualify for Private Residence Relief when you sell. This relief can reduce or even eliminate CGT.
2. Selling Quickly: Since the base cost for CGT is the property’s market value at the time of the deceased’s death, if property prices are not rising rapidly, selling the property soon after inheriting might mean little to no gain, hence no or minimal CGT.
3. Use the Annual Exemption: Everyone has an annual tax-free allowance for capital gains. For the 2023/2024 tax year, this allowance is £6,000. If your taxable gain (after considering expenses and reliefs) is below this threshold, you won’t have to pay CGT. If you co-own the inherited property, each owner can use their own allowance against their share of the gain.
4. Offsetting Losses: If you have made capital losses in the same tax year (or have unused losses from previous years), you can offset these against your capital gains, reducing the taxable amount.
5. Gifting to Spouse or Civil Partner: If you’re married or in a civil partnership, you can transfer assets between each other without triggering CGT. If one partner hasn’t used up their annual exemption or has capital losses to offset, it might be tax-efficient to transfer a portion of the property to them before selling.
6. Improvement and Deductible Expenses: Keep track of expenses related to improving the property (which can increase its value) or associated with selling the property. These expenses can be deducted from the gain, reducing the taxable amount.
7. Consider Holding Until Death: If you’re in a position to do so, holding onto the property until you pass away can reset its base value for CGT purposes. When your heirs inherit the property, their base cost for CGT will be the market value at the time of your death, potentially minimizing their future CGT liability.
8. Lettings Relief: Note that Lettings Relief, which used to provide a significant reduction in CGT for properties that were once a primary residence and later rented out, has been significantly curtailed since April 2020. It’s now only available to those who live in the property with their tenant.
9. Professional Advice: It’s always recommended to seek advice from a tax specialist or financial advisor when dealing with potential CGT issues. They can guide you on the best strategies tailored to your circumstances and ensure you act within the legal framework.

Remember that tax regulations can change, so it’s essential to stay updated or consult with a professional who is aware of the latest rules and allowances.

Conclusion

Inheriting money in the UK may have tax implications, such as income tax on generated income or inheritance tax on the total value of the estate. While you may not need to inform HMRC directly about the inheritance, it is essential to understand and fulfil your tax obligations by reporting taxable income or inheritance tax liabilities through appropriate channels. Managing capital gains tax on inherited property and considering the impact on means-tested benefits like universal credit are also important aspects to consider.

Consulting with tax professionals and seeking accurate advice will help ensure compliance and effective management of your financial responsibilities.