As a beneficiary, if you later sell or earn income from inherited assets, there may be income tax consequences. And if you inherit certain tax-deferred accounts like a traditional IRA or 401(k) account, you'll pay taxes on your withdrawals, including RMDs, as ordinary income at whatever your rate is.
Tax liability attaches to and moves with estate assets. Therefore, beneficiaries will be responsible for any tax liability not already paid by the estate. If a beneficiary receives income that would have otherwise gone to the decedent, they must pay tax on the money.
Gift and loan trusts
A useful way to create some flexibility is to use a 'gift and loan trust'. On death, the value of any loan outstanding falls into your estate. However, the value of any trust investment made and the growth on it will generally fall outside your estate for IHT purposes.
Stocks and cash: Inherited cash generally isn't taxable unless the estate exceeds the applicable estate or inheritance taxes. Stocks also aren't taxable unless they are subject to estate or inheritance taxes but could result in capital gains taxes when you sell them.
Gifts and inheritance Personal income types
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income.
Certain types of assets are also exempt, or partially exempt, from inheritance tax. In particular, pension pots are not treated as part of an individual's estate, and agricultural and business property can attract either 50% or 100% relief.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.
The best way to avoid the inheritance tax is to manage assets before death. To eliminate or limit the amount of inheritance tax beneficiaries might have to pay, consider: Giving away some of your assets to potential beneficiaries before death. Each year, you can gift a certain amount to each person tax-free.
When you inherit investments, you don't inherit them at their cost basis (what the original investor paid for them). Their value on the day they transfer to you is (for income tax purposes) your cost. In most cases, that “cost” is higher than the original purchase price. It's stepped up.
Withdrawals of contributions and earnings are taxed. Distributions may be penalized if taken before age 59 ½, unless you meet one of the IRS exceptions.
That is because inherited assets are generally not taxable income for individual beneficiaries. However, if the inherited assets generate income (e.g., rental properties, investments), that income may be subject to income tax.
When you inherit property, the IRS applies what is known as a stepped-up cost basis. You do not automatically pay taxes on any property that you inherit. If you sell, you owe capital gains taxes only on any gains that the asset made since you inherited it.
Immediately after receiving an inheritance, you should notify your local Social Security office.
In general, any inheritance you receive does not need to be reported to the IRS. You typically don't need to report inheritance money to the IRS because inheritances aren't considered taxable income by the federal government. That said, earnings made off of the inheritance may need to be reported.
Bottom Line. California doesn't enforce a gift tax, but you may owe a federal one. However, you can give up to $19,000 in cash or property during the 2025 tax year and up to $18,000 in the 2024 tax year without triggering a gift tax return.
This means that when the beneficiary withdraws those monies from the accounts, the beneficiary will receive a 1099 from the company administering the plan and must report that income on their income tax return (and must pay income taxes on the sum).
But when gains are inherited, the loophole zeroes out the gain for tax purposes. As a result, an investment sale that would create a taxable gain for the original owner is tax-free for the inheritor. Example: an investor buys 100 shares of stock for $200. Ten years later, the stock is worth $500.
Each state has different estate tax laws, but the federal government limits how much estate tax is collected. Any estate worth more than $11.8 million is subject to estate tax, and the amount taken out goes on a sliding scale depending on how much more than $11.8 million the estate is worth.
Your house and any other properties you own. Any savings or investments (remember, some types of pensions are excluded from your estate, but other investments, including ISAs, are taxable).
This is known as your 'annual exemption'. You can give gifts or money up to £3,000 to one person or split the £3,000 between several people. You can carry any unused annual exemption forward to the next tax year - but only for one tax year. The tax year runs from 6 April to 5 April the following year.
The IRS allows you to gift up to $18,000 in money or property to an individual each year without having to report it to the IRS (for the tax year 2024).