Will I need to pay inheritance tax on money my friend left me?

Published by Lisa Vaughan on 26 February 2018.
Last updated on 26 February 2018

Q

My friend gifted me £20,000 shortly before she died earlier this year. Her estate has been valued at around £400,000 but, apart from £80,000 going to friends and family, the balance is being donated to three charities. Am I liable for inheritance tax on what she gave me? Do I have to declare it to the solicitor dealing with her estate? I am also one of her executors.

From:
BM/Bradford

A

Everyone has a tax- free inheritance tax (IHT) allowance. This is the amount that they can pass on without tax being due. Also known as the nil-rate band, it is currently £325,000. IHT at a rate of 40% is levied on chargeable assets above this £325,000 threshold.

For tax purposes, an estate is defined as a person’s property, savings and other assets after debts and funeral expenses have been settled.

Leaving a part of or your entire estate to charity can reduce and, in some situations, eliminate the IHT liability.

If you leave something to charity in your will, then it won’t count towards the total taxable value of your estate.

This is known as leaving a ‘charitable legacy’. If more than 10% of a deceased’s net estate (after deducting IHT reliefs, exemptions and the nil-rate band) is left to charity, then a reduced rate of 36% IHT is levied.

Based on the information you have given, your late friend’s taxable estate is likely to be under the nil-rate band of £325,000, due to the generous amount she left to charity. As no IHT is likely to be due on her estate, no tax is likely to be payable on your gift.

If you need any further clarification, I suggest you speak to the probate solicitor who I’m sure will provide you with further information.

Lisa Vaughan is a chartered financial planner at Fogwill & JonesFind out who our experts are on the Ask the Experts homepage.

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