When someone dies, their estate comprising all they owned at the time of death less any debts and will be passed to their beneficiaries. Beneficiaries can be named if the deceased had written a Will, otherwise it will pass down the family tree in accordance with the Laws of Inheritance which are legally binding and cannot be changed. A Will names an Executor a person who the deceased has chosen to ensure their wishes are carried out. In the case of intestacy, where there is no Will, this role is called the Administrator. They both carry out eh same duties and have the same responsibilities, it’s just they are given a different title.
The Executor or the Administrator, has the responsibility for ensuring all debts and taxes due are paid before any money and assets are distributed from the estate. This is a legal requirement and failure to carry out these duties can have serious consequences.
Inheritance Tax(IHT), who pays and how much?
Inheritance Tax is a tax on the value of a deceased’s estate after they die. Formerly these were known ‘death duties’, a redundant term as Inheritance Tax consolidated these multiple duties into a single tax in 1986. Technically, Inheritance Tax is a transfer tax on the net collective value of an estate as it passes from one person i.e. from the deceased to another people. Like any other tax, it is collected by HMRC and like any other tax, there are requirements governing its payment and penalties for failing to comply.
Each of us is given an allowance of £325,00 below which no IHT is payable, although you will still have to complete the IHT forms to show that the estate has been accurately valued. However there is no IHT payable regardless of the value of the Estate, if it all left to the spouse and on their death the IHT allowance is £650,000 before IHT kicks in.
Inheritance Tax is levied at a rate of 40% on the net value of the estate i.e the gross value of the Estate, less the allowance and less any debts, such as mortgages, loans and credit card bills and bequests to charities. The Executor or Administrator is responsible for working out the net value of an Estate. Failure to discharge these duties accurately may leave them personally liable for any fines and interest due, particularly if they have subsequently distributed the value of the estate to other beneficiaries as they are under no obligation to provide funds to pay towards any miscalculations.
When does Inheritance Tax have to be paid?
A Grant of Probate is required before any assets can be released form an Estate. This will not be given until confirmation is received from HMRC that all due Inheritance Tax has been paid. In practical terms that HMRC expects you to pay Inheritance Tax before you do anything else and that means have access to any funds from the Estate to pay this bill. Inheritance Tax should be paid within six months of death and if it is then HMRC will start to charge interest on the overdue sum.
Which other HMRC taxes apply?
This will depend on the deceased person’s circumstances but there may be Income Tax due and a completed a tax return will need to be submitted. In some cases, Capital Gains Tax may apply if the value of the deceased’s property and any other sold assets has risen since they were valued for probate purposes. Beneficiaries inherit assets at their probate value so if this rises they are liable to pay Capital Gains Tax on the increase.