Chas Roy-Chowdhury of ACCA
BBC News' Ask the Expert column gives readers a chance to have their financial questions answered.
This week, Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA), helps Your Money reader Robert Ball.
Mr Ball has inherited £38,000 from his uncle.
He says there is no inheritance tax to pay because his uncle's total estate value is under the threshold. However Mr Ball wants to know if he will pay income tax on his inheritance.
Mr Roy-Chowdhury offers some general guidance on income, inheritance and capital gains tax rules surrounding inheritance - and how to plan ahead.
Chas Roy-Chowdhury writes:
As Inheritance Tax (IHT) is linked inextricably to death, it's a subject about which none of us like to think about.
This steep tax can, however, be avoided by many if they plan well in advance.
Planning ahead would reveal that Inheritance Tax allows life-time 'gifts' - that is, the transfer of money or items from one person to another - to become non-taxable if the person making the gift survives for seven years thereafter.
In addition, annual gifts of up to £3,000 a year in total are also exempt from IHT, as are any number of gifts of up to £250 each. There are also exemptions for where parents make a gift at the time of their child marrying.
There are also tax benefits to be gained if you are married. The transfer of assets between spouses is exempt from IHT and optimises the use of a zero-rate tax allowance band - called the Nil Rate Band. Each spouse has a £300,000 Nil Rate Band.
In the specific case in point, the £38,000 gift from his uncle's estate will not be subject to Inheritance Tax because it falls within the Nil Rate Band, assuming that this was the sum total of his estate. Nor will Mr Ball be required to report the gift to the Inland Revenue on his tax return, as reporting obligations will fall on the executors of the deceased uncle's estate.
As far as any other taxes are concerned, there will be no obligation to pay income tax or Capital Gains Tax (CGT) on the gift.
The only time when there might be further tax to pay will be if the money is invested and it earns interest. There will then be income tax to pay for a higher rate tax payer - that is, one who pays tax at 40%.
In addition, CGT would potentially be payable on any gains which are made on funds from the gift invested in assets such as paintings or stocks and shares - if those gains are worth more than £9,200 a year.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.