Do You Pay Tax on an Inheritance?

Detailed Explanation

People often worry that an inheritance will come with a large tax bill, partly because so much of what is written online about "inheritance tax" is about one country only. The honest answer is that it depends heavily on where the person lived and where the assets are. See the Wills, Probate & Estates hub for how tax fits into settling an estate.

Three taxes that get confused

Three different kinds of tax can come up when someone dies. Most countries use one or two of them, not all three.

• Estate tax is charged on the total value of what the person left, and is paid out of the estate before it is shared out. UK Inheritance Tax works this way despite its name, as does US federal estate tax.
• Inheritance tax in the narrower sense is charged on what each beneficiary receives, often at a rate that depends on how closely they were related to the person who died. Several US states and a number of other countries use this model.
• Capital gains tax and income tax don't tax the inheritance itself. They can apply later, when an inherited asset earns income or is sold for more than it was worth.

Some countries, including Australia, have neither an estate tax nor an inheritance tax. Tax only comes into it through capital gains and income.

Is an inheritance treated as income?

In Australia, the UK and the US, receiving an inheritance generally isn't treated as income for the person who receives it. IRS guidance treats property received as a gift, bequest or inheritance as generally not included in income, and HMRC guidance says beneficiaries don't normally pay tax on things they inherit.

Tax can still arise afterwards:

• Income from what you inherited, such as rent from an inherited house or interest on inherited savings, is generally taxed like any other income.
• Selling an inherited asset can trigger capital gains tax. How the gain is measured differs by country, as explained below.
• Inherited retirement accounts and pensions often have their own rules. In the US, for example, withdrawals from an inherited pension or IRA are usually taxable income for the beneficiary. In Australia, superannuation death benefits are taxed under separate rules again.

Selling what you inherit

Capital gains tax usually depends on the difference between the asset's value when you acquired it and its value when you sell it. Countries differ in what counts as your starting value for an inherited asset:

• United States: the starting value (called the basis) of inherited property is generally its fair market value on the date of death. This "step-up" means growth in value during the person's lifetime usually isn't taxed when the beneficiary sells.
• United Kingdom: when you sell inherited property, the gain is generally worked out from its value when the person died (the value used for Inheritance Tax purposes), not what they originally paid.
• Australia: the rules depend on when the person bought the asset. For many assets bought on or after 20 September 1985, the beneficiary takes over the deceased's original cost, so gains during the person's lifetime can be taxed on a later sale. There is an exemption for a family home sold within a set period. The Australian page below covers this in detail.

How the rules differ between countries

Tax rules and thresholds change often. The figures below are as of 2026, and the relevant tax authority should be checked for the current position.

United Kingdom. Inheritance Tax is paid from the estate by the person dealing with it, and is generally due by the end of the sixth month after the death. There is normally none to pay if the estate is worth less than £325,000, or if everything above that is left to a spouse, civil partner or charity. The standard rate is 40%, charged only on the part above the threshold. The threshold can rise to as much as £500,000 when a home is left to children or grandchildren. Beneficiaries don't normally pay tax on what they inherit, though they may pay tax on income from it.

United States. Federal estate tax applies only to very large estates. The filing threshold is $15,000,000 for people who die in 2026. Property left to a surviving spouse generally qualifies for an unlimited marital deduction, and a surviving spouse may be able to use their late spouse's unused exemption. The tax is paid by the estate, not by individual beneficiaries. States add another layer: some charge their own estate tax, often with lower thresholds, and a few charge an inheritance tax. Pennsylvania, for example, charges 0% on transfers to a spouse, 4.5% to children and other direct descendants, 12% to siblings and 15% to most other heirs. New Jersey charges an inheritance tax on some beneficiaries but stopped charging its estate tax for deaths on or after 1 January 2018. Whether any state tax applies depends on the state where the person lived and where property is located.

Australia. There is no inheritance tax or estate duty. Tax only becomes relevant through capital gains tax when an inherited asset is sold, income tax on what it earns, the tax rules for superannuation death benefits, and the deceased's own final tax return.

Other countries. Many countries in Europe and elsewhere tax inheritances or estates, often with lower rates or larger allowances for spouses and children than for more distant relatives or friends. The rules, rates and who pays vary widely, so another country's system shouldn't be assumed to apply.

How it works where you are

• In Australia: Do you pay tax on an inheritance in Australia? covers why there is no inheritance tax, how capital gains tax applies when an inherited asset is sold, the pre-1985 asset rules and the main residence exemption for an inherited home.

Things to Consider

• Where the person lived matters most. Estate and inheritance taxes usually follow the person who died, and sometimes the location of property, rather than where the beneficiary lives.
• Tax comes out before you receive your share. In estate-tax countries such as the UK and US, the executor deals with the tax, which can delay distribution.
• Keep valuations and records. The value of an asset at the date of death is often needed years later when it is sold. Getting a proper valuation early saves trouble.
• Debts are a separate question. Beneficiaries generally don't take on the person's debts either. See do you inherit debt when someone dies.
• Get advice for larger or cross-border estates. Where property is held in more than one country, or where an estate is near a tax threshold, an accountant or tax adviser can make a real difference to the outcome.
• Remembering them can happen alongside the paperwork. Estate tax matters can take many months. An online memorial gives family and friends a place to share stories and photos while the practical side is settled.

Common Mistakes

• Assuming one country's inheritance tax applies everywhere. UK and US rules are widely quoted online and are often wrongly applied to people in Australia and elsewhere.
• Declaring an inheritance as income. In most cases it isn't income. What matters is the income it earns and any gain when it is sold.
• Selling an inherited asset without checking the tax position first. Timing can affect capital gains tax, and some exemptions depend on selling within a set period.
• Forgetting state taxes in the US. An estate below the federal threshold can still owe a state estate tax or inheritance tax.
• Treating retirement accounts like other inherited assets. Pensions, retirement accounts and superannuation often follow their own tax rules.