When Is an Inheritance Taxable Income? Separating Inheritance Tax from Income Tax in the UK

Belgravia Capital
May 31
4 min read

If you’ve recently inherited money, property, or investments, it’s natural to wonder what tax consequences you might face.

One of the most common questions we hear is:

“When is an inheritance considered taxable income?”

The short answer: in most cases, it isn’t.

But there are important exceptions, especially when inherited assets start generating income or come from abroad.

At Belgravia Capital Wealth Management, we help beneficiaries and families navigate the complex overlap between inheritance tax and income tax.

In this article, we’ll break down what is and isn’t taxable as income, what to report to HMRC, and how to avoid unnecessary tax exposure.

Is Inheritance Itself Classed as Taxable Income?

No, inheritance is not classed as income in the UK.

If you receive:

A lump sum of cash from someone’s estate
A share of the sale of a deceased person’s home
Personal possessions such as jewellery or art

…then you do not need to pay income tax on the amount you receive.

However, the estate itself may have paid inheritance tax (IHT) before assets were distributed to you. That tax is paid by the estate, not the beneficiary.

So while you may receive a reduced inheritance due to IHT, you do not pay income tax on it.

When Does Inherited Wealth Become Taxable Income?

Although the act of inheriting isn’t taxable as income, some inherited assets can later produce taxable income.

Here’s when income tax may apply:

Income From Inherited Property

If you inherit a property and later:

Rent it out
Earn income through Airbnb or lodgers

You must declare this income on your Self Assessment tax return, and it will be taxed according to your personal income tax band.

Income From Inherited Investments

If you inherit:

Shares
Dividends
Investment bonds
Unit trusts or OEICs

You are responsible for declaring dividends, interest, or capital gains received after the date of inheritance.

Any growth or income earned after the transfer belongs to you and is taxable as part of your normal income or gains.

Distributions From a Trust

If your inheritance comes via a trust, the situation is more complex.

You may pay income tax on:

Trust income distributions (e.g. from rental income or dividends)
Beneficiary payouts from income-generating trusts

The trustee usually deducts tax before making a payment, and you may need to complete a tax return to reclaim or top up the tax depending on your marginal rate.

Foreign Inheritances

If you inherit assets from outside the UK, income tax may apply depending on:

Whether the assets are repatriated
Whether income is generated in a foreign jurisdiction
Your own residency and domicile status

Specialist advice is essential in these cases to avoid double taxation or falling foul of HMRC reporting rules.

What About Capital Gains Tax on Inherited Assets?

You do not pay Capital Gains Tax (CGT) when you inherit an asset.

However, you will pay CGT if and when you later sell an inherited asset that has increased in value since the date of inheritance.

Example:

You inherit shares worth £50,000
You sell them two years later for £70,000
You may pay CGT on the £20,000 gain (after your annual exemption)

The key is to use the probate value (i.e. market value on the date of death) as your cost basis for CGT calculations.

What If You Receive an Inheritance Over Several Years?

In some cases, an estate may take time to settle or pay out in stages.

You are not taxed on the inheritance amount, even if it’s delayed — but you are taxed on any interest earned while money sits in an account, or on income generated by investments passed to you.

This can happen when:

You’re a residual beneficiary
The estate includes rental or investment income
A will trust is involved

Again, the income, not the inheritance, is what’s taxable.

Should You Report an Inheritance to HMRC?

There is no legal requirement to report an inheritance to HMRC if:

You are a UK resident
You inherit UK-based assets
The assets do not generate income or capital gains

However, you must report:

Any income generated from inherited assets (e.g. rental income, dividends)
Capital gains when you sell inherited property or investments
Trust income distributions (if applicable)
Non-UK income or gains from foreign inheritances

Summary: When Inheritance Becomes Taxable Income

If you receive a lump sum inheritance, it is not considered taxable income in the UK.

The sale proceeds from an inherited home are not taxable as income, but you may be liable for Capital Gains Tax (CGT) if you sell the property at a higher value than it was worth when inherited.

Any rental income from an inherited property is taxable and must be declared on your Self Assessment tax return.

Dividends earned from inherited shares are also taxable income, and you are responsible for reporting them to HMRC.

If you receive distributions from a trust, these are typically subject to income tax, depending on how the trust is structured and taxed.

Foreign income from inherited assets may be taxable in the UK, especially if you’re a UK resident, and must be reported to HMRC if applicable.

Finally, the growth on inherited investments is not taxed when inherited but may trigger Capital Gains Tax if you sell the investments for more than their probate value.

How Belgravia Capital Wealth Management Can Help with Determining IHT

We support beneficiaries and families by:

Advising on income-producing inherited assets
Minimising income and capital gains tax liabilities
Ensuring trusts are structured and reported properly
Coordinating with accountants and solicitors to keep you compliant
Helping you reinvest your inheritance tax-efficiently

Whether you’re dealing with a complex estate, foreign assets, or uncertain trust income, we’ll help you keep your tax exposure as low as possible.

Conclusion: When Is an Inheritance Taxable Income?

Inheriting wealth is not the same as earning it - and in most cases, the money or property you receive is not classed as income.

But the moment those assets start generating income, the rules change.

If you’ve recently inherited or are expecting to, make sure you understand the difference and take action to stay compliant and tax-efficient.