Legal

What Tax May I Have to Pay When I Die?

The application and collection of taxes is a necessary means of the government raising funds to provide essential public services, such healthcare, schools and transport networks.

14 Jun 2024

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Emma Boys-Smith

Emma Boys Smith

Taxes can apply to living persons, corporate entities and even deceased persons.

Below is an introduction to some of the taxes that can apply even after you pass away.

Inheritance Tax

When a person passes away, everything they leave behind forms part of their estate.  Inheritance tax (‘IHT’) is a tax that is paid on death depending on the value of the estate.

In general terms if an estate is above a certain threshold, explained further below, the persons responsible for looking after the estate are known as Personal Representatives (‘PRs’). The PRs may have to report to HM Revenue and Customs, the government body responsible for overseeing and collecting taxes, and pay inheritance tax which is currently charged at 40%.

However, you may be able to claim tax reliefs which may mean that your estate does not need to pay as much tax or any at all.

Some tax reliefs include:

  1. Nil Rate Band – as at April 2024 figures, if your estate is worth £325,000 or less it is not liable to pay IHT.
  2. Transferable Nil Rate Band – if your spouse or civil partner passed away leaving their entire estate to you under their will, you can transfer over any of their unused nil rate band of £325,000 to your own allowance.
  3. Full exemption for gifts to a spouse, civil partner or charity – legitimate, outright gifts to those listed under this heading would qualify for IHT exemption. For example, if a person passes away leaving everything to their surviving spouse under their Will, there will be no IHT to pay.
  4. Residence Nil Rate Band – if you are leaving your home to your children or grandchildren you may be able to increase your threshold by up to another £175,000.
  5. Transferable Residence Nil Rate Band – similar to the nil rate band, spouses and civil partners can also share residence nil rate bands (RNRB) and carry over unused RNRB allowances.
  6. Business Relief – if you own shares in a trading business for at least 2 years before you pass away, your estate may be able to qualify for business relief and claim exemption of up to the whole value of the business shares.
  7. Agriculture Relief – if you own agricultural land you may be able to pass on the land and/or property IHT free either during your lifetime or as part of your Will where it is a working farm in the UK and certain requirements are met.
  8. Gifts – you do not have to pay IHT for outright gifts made more than 7 years before you pass away. If the gift is made to someone other than a spouse or civil partner within 7 years of passing away then your estate will likely have to account for it for IHT purposes, although the rate of IHT which applies can vary. You can usually make small or regular gifts during your lifetime without accounting for IHT (for example paying a child £50 every birthday, or where the total gifts made in a year do not exceed £3,000 in a tax year). If you make a gift but still retain a benefit to that gift, for example transferring your home to a child but you continue living there rent-free), it would not qualify for any IHT exemption and would likely form part of your estate for IHT calculation purposes.

Every estate will need to be assessed for Inheritance Tax liability and therefore you should seek legal advice from an expert to ensure that the correct is paid and all applicable reliefs have been applied for.

Capital Gains Tax

Capital Gains Tax (‘CGT’) is a tax you pay when you sell an asset which has increased in value over a certain threshold. The threshold depends on the type of owner of the asset and the year the asset is sold but for the 2024 tax year the capital gains tax-free threshold is not more than £3,000.

If you pass away owning assets, as well as the estate accounting for IHT, your PRs might also need to pay CGT where an asset has increased in value between the time it was acquired and the time it is sold, even where the asset was acquired whilst you were alive and is not sold until after you pass away.

Some disposals, such as gifts between a spouse or civil partner or the sale of your main residence are exempt from CGT completely. Likewise, some asses such as government premium bonds.

CGT can be avoided for estates where the asset is directly transferred to the beneficiary, rather than being sold and converted to cash.

For 2023/24 the rate of CGT for personal representatives is 28% on residential property or 20% on other chargeable assets.

Income Tax

Some assets in the estate may continue to generate income after death until they are transferred or sold. For example, payments from dividends, rental income or business profits. Estates still are required to pay basic rates of tax on dividends and other income.

PRs need to complete a self-assessment tax return on behalf of an estate for income that has not already been reported. This includes any unreported periods before death. However you may not need to report the estate to HMRC if the only income received during the administration period was from bank account interest which was less than £500 per tax year.

You may wish to hire a professional such as an accountant to help you submit the tax return on behalf of the deceased.

M&P Commentary

Emma Boys-Smith, a Solicitor in our Wills & Probate team, said:

“It is important to account to HMRC for all taxes correctly and on time, otherwise the estate and sometimes even the PRs may become liable to pay interest and penalties.

When administering an estate or applying for a grant of probate, IHT is usually one of the key considerations because if it is due, the rate of tax is especially high.

For specialist subject matters such as tax, unless you are confident and competent it is usually better to seek expert advice. The starting point is normally a qualified probate lawyer. They can help to ensure an estate pays as little tax as possible by applying all applicable reliefs ensuring there is more to share amongst loved ones and beneficiaries.

Mullis & Peake has an awarding winning team ready to give support and relieve you of this burden to ensure the estate pays the correct tax owed if applicable. We can also provide estate planning advice and set out your current tax liability if you are thinking of preparing a Will, creating a trust or need advice generally on your estate so that you can feel reassured in knowing what tax reliefs may be available and what tax your estate may be expected to pay when you pass away.”

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