When someone passes away, dealing with their tax affairs can be one of the more daunting tasks for the executor or personal representative. A solid understanding of your responsibilities will help streamline the process from inheritance and income tax to potential capital gains. Here’s an overview of the steps, taxes involved, and common considerations for executors handling a deceased person’s financial matters.
Establishing your role as executor
The executor, named in the deceased’s will, manages the estate. This process starts with obtaining probate, a legal document that confirms the executor’s authority to act on behalf of the deceased. In cases where there’s no will, a close relative can apply to be an administrator through a ‘grant of letters of administration.’
Once appointed, executors or administrators gather information about the deceased’s assets, pay off debts, and distribute what remains to beneficiaries. Central to this is settling tax obligations, which can impact the estate’s value and beneficiaries’ share. It’s important to keep comprehensive records of all assets, liabilities, and steps taken, as HMRC may require a clear account of actions.
Key tax obligations: Inheritance tax, income tax, and capital gains tax
Executors must consider several types of tax, each with specific responsibilities and deadlines.
1. Inheritance tax (IHT)
IHT is perhaps the most familiar tax when discussing estates. In the 2024/25 tax year, IHT generally applies at a rate of 40% on the portion of an estate valued over £325,000, the ‘nil-rate band’. However, several allowances and reliefs can reduce this amount. For example, if the deceased’s home is left to their children or grandchildren, the residence nil-rate band can add £175,000 allowance, bringing the total tax-free threshold to £500,000.
If the estate’s total value is below the £325,000 threshold, no IHT is due, though you must still report the estate’s value to HMRC. And where assets pass between spouses or civil partners, there’s usually no IHT due; unused allowances can transfer to the surviving partner’s estate.
When to pay: IHT payments are typically due within six months of the end of the month in which the person died. It’s essential to pay on time to avoid interest charges. Executors can often pay IHT through an instalment plan if needed, as HMRC allows payments over ten years on certain assets, including property. However, interest will accrue on the outstanding balance.
2. Income tax
Any income generated by the deceased up to their date of death may still be subject to income tax. When income continues to accrue on estate assets like interest from bank accounts or rental income, the deceased’s estate administration period may also create income tax liabilities.
For example, income received after death but before the estate is settled must be reported to HMRC. While most people manage income tax through PAYE or self-assessment during their lifetime, any residual tax owed may need to be addressed separately as part of the estate’s settlement. Executors may use the R27 form to claim a tax refund for the deceased if they overpaid tax in their final year.
When to pay: Any income tax due for the deceased’s last year is typically due by 31 January following the year of death. Executors should check if any outstanding liabilities require payment from the estate, ensuring all tax matters are resolved before final distributions to beneficiaries.
3. Capital gains tax (CGT)
Capital gains tax applies if assets from the estate are sold at a profit. Executors benefit from a special CGT allowance during the estate administration period, known as the ‘executor’s annual exemption,’ which is £3,000 for the 2024/25 tax year. Gains exceeding this allowance are subject to CGT at rates that vary depending on the type of asset and the taxpayer’s status.
One point to consider is that if assets are passed directly to beneficiaries without being sold, any CGT obligations transfer to the beneficiary. However, if the executor sells assets, CGT will likely be payable, especially on properties or shares.
When to pay: CGT must be paid by 31 January following the tax year in which the gains were realised, aligning with standard UK tax deadlines. This applies to the sale of any assets during the administration period.
Claiming tax reliefs and refunds
Executors have the right to claim several reliefs and refunds that can reduce the estate’s tax burden. If the deceased left 10% or more of their estate to charity, IHT rates on those assets may drop from 40% to 36%. This relief could make a significant difference for estates with a charitable focus.
Moreover, if the estate has paid IHT on assets that lose value before they are sold — such as shares or property — the executor can claim IHT relief, reducing the IHT on the sale. This can be particularly relevant during volatile market conditions.
Working with HMRC and ensuring compliance
As an executor, ensuring compliance with HMRC’s tax rules is critical. Keeping detailed records of all asset valuations, tax returns, and any communication with HMRC can help prevent delays or disputes. Submitting accurate information and meeting all deadlines also helps minimise any additional liabilities for the estate. If the estate is substantial or complex, professional advice can be invaluable, especially for larger estates or where beneficiaries have specific needs.
Managing distributions to beneficiaries
Once all taxes and debts are paid, executors can begin distributing the estate according to the deceased’s wishes. Importantly, beneficiaries have no automatic rights until the estate is cleared of liabilities. By following due process, executors can ensure that all beneficiaries receive their rightful share and that HMRC is satisfied.
Working with professional advisers is often wise for larger estates. Complex estates may have additional considerations, such as foreign assets or business interests, which can have their tax implications.
The bottom line
Managing an estate requires attention to detail, time, and patience. By addressing each tax obligation carefully and working closely with HMRC, executors can help ensure they fulfil their responsibilities and distribute the estate effectively. Executors who feel overwhelmed by the role can consider seeking professional guidance to handle the estate accurately and efficiently.
Contact us today to see how we can help you deal with tax when somebody dies.