A friend of mine, not a client, has asked me a question and I unsure of the correct answer.
He is about to receive about £60,000 in inheritance and wanted to knwo if this needed to be declared as income for tax cretir purposes.
I looked at HMRC guidance and it is as follows:
"Income from trusts, settlements and estates (for tax credits)
You might have received income from a trust, settlement or the estate of someone who has died. If so, the trustees or administrators will have given you a certificate telling you what income was paid to you. This will either be form R185 (Trust) or form R185 (Estate). Include the gross amount - the amount before any tax was taken off."
Every other bit of research I have done states that this payemnt is capital and therefore not to be declared as income for tax credit purposes.
What are others thoughts on the correct answer, as the impact on my friend is quite significant. If income is declarable he will have to repay quite a lot of tax credits awarded. if not then he will repay quite a lot of his mortgage off. He just can't do both.
Replies (5)
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To me, it's not income from a trust, settlement or estate...it's the actual capital being paid out of an estate.
If the £60,000 were in a trust, settlement or estate gaining interest and you received the interest and (whether or not you got a form R185) it's income.
Really can't see actually inheriting £60,000 would be disclosable as 'income'.
Might need to be disclosed to HMRC or DWP for other purposes (means tested benefits etc.) but that doesn't seem appropriate in your instance.
Income or capital is a question of fact.
If this is the balance of an estate then it is almost certainly the capital sum, perhaps with a little income as well.
Why do you think it might be income?
Ask the Solicitor/Executor
There are occasions where the estate is likely to have income, not necessarily a high amount, during the tax year. If a capital payment is being made it could be deemed that the first £x is the income of the estate with the balance remaining as capital. As you will also need to know for tax return purposes you should check with the Solicitor the status of the payment.
Inheritance and Tax Credits
The Tax Credit Guidance is not overly helpful and so Jekyll I wouldn't beat yourself up for having 'mis-read HMRC guidance' the guidance is ambiguous to say the least. It seems clear that any income earned over and above the original inheritance would be taxable and declarable for tax credit purposes. What isn't clear to me, at least, is should you voluntarily declare the capital payout to HMRC for Tax Credits purposes. Though the capital, if below the inheritance tax threshold of £325,000, is free of inheritance tax should you inform the HMRC Tax Credits of its receipt and as a consequence will this affect your Tax Credits. As regards any interest or subsequent investment gains on the capital again this would be taxable and, less an allowance of £300, would be declarable to Tax Credits. But what about the initial capital payment? This is unclear and a simple statement that the capital payment of your inheritance should (or should not) be included as income would have been helpful.