Well, in the UK this is a perfectly fine way, in fact the most natural way to ask someone what year they are in at school or at university. The US has a different schooling system (use of 'grade' rather than 'year') so I have the impression it would be unlikely to be used in that context in the States.

Your question should be this: "Does this sound natural?" (Check your grammar book on how to ask questions in the present simple) And the answer? Yes, it's perfectly natural in the context of a conversation with a British schoolchild. For example: "I go to Bridge End School" "Do you? What year are you in? "I'm in year 8. "

In the US, we ask students in high school or below (especially below high school) "What grade are you in?" Elementary-age students would likely answer, "2017," to a question like "What year are you in?" Although if "2017" is the answer you are looking for, then the more natural way to ask the question is, "What year is it?" For university and above, "What year are you in?" works, or even, more informally, "What year are you?" The answer to these questions can be "second year," or "junior year," etc.

Which grade are you ?

I agree with Paul totally that this is the expression we would use in the UK. This sentence should be seen in the context in which it is written. It MUST have been preceded by another sentence which would give some context to it. If preceding sentence had something to do with an educational establishment, for example: "I attend the local High School" can be followed by "What year are you in" If the preceding sentence had been "The moon is made of cheese" then "What year are you in" would show that whoever said the sentence about the moon must be living (in their mind) several hundred years ago. This agrees with Joao Paulo's reply. There are other possibilities