This guidance will help you understand the tax liabilities that may arise when someone dies.
It gives basic information about Income Tax and Capital Gains Tax and briefly mentions Inheritance Tax. It also explains what you need to do if you are a:
When someone dies, the person responsible for settling his or her affairs and for administering their estate is known as the executor or the administrator. Their responsibilities are the same, and here the term personal representative covers both roles. The principal duties of the personal representative are to gather in the assets of the deceased person, settle their debts and other liabilities (including any taxes payable), and pass any legacies and the balance of the estate across to beneficiaries according to the terms of the deceased's will. If there is no valid will, they must distribute the estate according to the 'rules of intestacy', that is, the rules of inheritance that apply where there is no will. If you are a personal representative you may also wish to look at the section on beneficiaries, as you may be asked by the beneficiaries of the estate for advice and assistance on the subjects covered there.
Beneficiaries are those who benefit from an inheritance from the estate or part of the estate. If you are a beneficiary you may be given a legacy (a specific asset or sum of money) or you may receive a share of the residue of the estate (meaning what is left in the estate after the personal representatives have paid out the debts, expenses, taxes and legacies).
The administration period is the period that runs from the day following the date of a person's death until the date when the personal representatives are satisfied that they have paid, or hold sufficient funds in the estate to cover, all outstanding liabilities. This means that they have taken all steps necessary to complete the administration of the estate and what is left as the free balance in the estate (the residue) has been identified.
Trustees are responsible for managing assets placed in a trust (if a trust has been created under the terms of the will or the rules of intestacy). A trust is an obligation binding a trustee to deal with property in a particular way for the benefit of another person or class of persons. If you are a trustee you have an obligation to the trust beneficiaries. When the trust commences will depend on how the trust is created, and when the assets are transferred across to the trustees.
Before you can act as a personal representative, you usually have to apply to your local Probate Registry to be appointed personal representative by 'a grant of probate', or 'letters of administration' ('a grant of representation'). In Scotland, you have to apply to the Sheriff Clerk's Office to get 'confirmation'. You may have to pay a fee for this and, where Inheritance Tax is due on an estate, you may have to pay at least some Inheritance Tax before you get recognition. If, however the estate is simple, for example the surviving spouse or civil partner inherits the majority of the assets that were jointly owned with the deceased, it is possible to deal with the estate without having to apply for a grant of representation or confirmation.
No. You do not have to use a solicitor to administer the estate or pay Income Tax, Capital Gains Tax or Inheritance Tax. But if the estate is large or the deceased owned many assets that may take time to sell or realise, you may decide that it is simpler to use a solicitor or accountant to take over the whole administration of the estate.
You should let the Tax Office know about the death as soon as you can. This helps to avoid relatives being upset by tax bills or letters addressed to the deceased person.
If you know which Tax Office dealt with the deceased's tax affairs then you should contact that office. The address and tax reference may be among his or her papers, for instance on recent tax forms or letters.
If you do not know which Tax Office dealt with the deceased's tax affairs you should:
Otherwise, please contact the Tax Office nearest to the deceased's home address. If there is any tax due to the date of death, the Tax Office dealing with the last private address of the deceased should assume responsibility for dealing with the liability. It will help if you can state the deceased's National Insurance number, which you can find on a pension or pay slip.
Income that the deceased received and capital gains he or she made for the period up to the date of death are taxed in the normal way.
So, depending on the circumstances, you may have to pay some additional tax or claim a tax repayment.
Remember, if you:
The Tax Office may ask you:
You may want to pass these requests on to your solicitor if you have appointed one to act for you.
The Tax Office may send you a Self Assessment tax return, asking you to give details of the deceased's income and any capital gains for the year ended on 5 April, or up to the date of death. If any tax is due, it will send you a notice of assessment showing how much tax you have to pay, and how it is calculated. You will then be responsible for paying the tax out of the estate funds.
If tax has been overpaid for any year this will be repaid to you and the repayment will be an asset of the estate.
If it appears that there may be a repayment due to the date of death, but a Self Assessment return or a repayment claim for that period have not been received, you may be asked to complete a form R27 and to give an undertaking that you will treat the tax repayment properly as part of the estate.
Personal representatives are chargeable to Income Tax on income that arises on the assets in the estate during the administration period.
Any income that arises on the assets in the estate after someone dies belongs to their estate. As personal representative, you may receive income due to the estate from the date of death until you complete the administration of the estate, and you are chargeable to Income Tax on that income. Most of the income that you receive will have been taxed already, such as bank interest, building society interest and dividends on company shares. As personal representative you will have no further tax to pay on these types of income.
However, income from some sources may not have been taxed when you receive it, for instance:
If you receive untaxed income which is not exempt, and have tax to pay on that untaxed income, you are bound by law to tell the Tax Office.
Yes, in the majority of cases the deceased's Tax Office will be responsible for dealing with any tax liability of the estate. This includes cases where the deceased's lifetime tax affairs were dealt with by Public Department (PD) 1 - that office will retain responsibility. But if the deceased did not have a Tax Office at the date of death, the Tax Office that deals with the address of the first-named personal representative will be responsible for dealing with the administration period liability.
But there are exceptions to the above, where the estate might be dealt with by High Net Worth Unit (HNWU) Bradford, or by HM Revenue & Customs (HMRC) Trusts & Estates.
If you believe you are liable for tax, you should contact the deceased's Tax Office.
The tax liability of the majority of estates is straightforward and can be dealt with by the deceased's Tax Office. Personal representatives may make an informal payment to the office that handled the deceased's tax affairs of the total liability for the whole period of administering the deceased's estate, provided that certain conditions are met. You should advise of any untaxed income and any tax due on that income. (The Tax Office can help you with the tax calculation if you want.) You will then be sent a payslip for you to return with your payment.
Different procedures apply, however, if a trust has been created under the terms of the deceased person's will or the rules of intestacy, or if the estate is regarded as 'complex'.
It may send you Self Assessment Trust and Estate tax returns on which to give details of income received and chargeable disposals made by the estate. Self Assessment is the method for calculating and paying tax.
If you receive a return from the Tax Office, then as personal representative you are responsible for completing and submitting a return and paying the tax on time. When completing the tax return, you can choose whether to calculate the actual tax due or ask the Tax Office to do the calculation for you.
If any tax is due it is important to keep to the time limits as failure to do so will result in automatic interest and possibly a late payment penalty being charged.
You may need to pay the tax due for any one year in three stages:
The first and second payments on account are each equal to half of the total liability for the previous year (net of tax deducted at source and excluding Capital Gains Tax).
When you want to wind up the estate you can ask the Tax Office to agree the liability for the final period and pay the tax due early. The estate can then be wound up without having to wait until the normal tax payment dates.
You may be asked to supply information about the people who will benefit from the estate (the beneficiaries), and whether a trust has been set up under the terms of the deceased's will or under the rules of intestacy.
Personal representatives are chargeable to Income Tax at the basic rate (20 per cent for 2008-09 onwards) only. Dividends from UK companies, and similar receipts, carry a tax credit of 10 per cent that meets the liability and cannot be repaid. Personal representatives might also have to pay tax at the dividend rate on foreign dividend income.
No. Once a person has died, his or her personal allowances are no longer available to set against the income you receive as personal representative. However, you may be able to claim certain tax reliefs that are not restricted to individuals, if, as personal representative you:
If you think you may qualify for tax relief the Tax Office can give you more information.
If you make a payment to a beneficiary during the administration of the estate, and the beneficiary asks you in writing for a statement of estate income, you must give them a written statement showing their income from the deceased person's estate for the year and the tax paid on that income. If you wish, you can use form R185(Estate Income) for this purpose. You can download this form from the HMRC website or blank forms can be supplied on request.
At the end of the administration period you should supply the beneficiary with a statement showing the full amount of estate income, and the tax paid on that income, from their share of the residue since the administration of the estate started. This should exclude income already treated as income of the beneficiary in previous years.
Transferring assets to a beneficiary and paying a beneficiary's debts are treated as making a payment to them in the same way as making a cash payment.
If you want specific advice about Income Tax during the period of administration contact the Deceased Estates Helpline
HMRC is unable to give you any legal advice about how you should administer the estate.
If the personal representatives sell capital assets from the estate, they are liable to Capital Gains Tax.
A chargeable gain is made when an asset is given away, exchanged, sold or disposed of in any other way, and its value has increased since it was first acquired. Capital Gains Tax is not charged on the asset itself but on the increase in its value during the period it has been owned. As personal representative, you are chargeable on all gains arising on assets owned by the estate.
Not as such, and a person's death is not an occasion of charge for Capital Gains Tax purposes. However, if the deceased had made a chargeable gain prior to the death that they had not already declared, you must include the gain in a tax return for the deceased for the period up to the date of death, and pay any Capital Gains Tax that may be due.
When you take control of the deceased's assets, they are treated as if you had acquired them at their market value at the date of death.
When you transfer an asset to a beneficiary under the will or under the rules of intestacy, you are not treated as disposing of it for Capital Gains Tax purposes. You have no chargeable gain or allowable loss on that disposal. Instead, the beneficiary is treated as if they had acquired the asset on the date of death, at its market value on that date.
Sometimes you may need to sell assets during your period as personal representative, for example, to raise money to pay Inheritance Tax or to settle cash legacies. If so, you will have to declare any chargeable gains you realise on estate assets, and pay Capital Gains Tax out of estate funds. Capital Gains Tax is chargeable on the personal representative only on gains arising on estate assets during the period of administration.
The rate of Capital Gains Tax on personal representatives for 2010-11 is 18 per cent for gains on or before 22 June 2010 and 28 per cent for gains after this date. For 2011-12 the rate is 28 per cent.
If the deceased had allowable losses in the year they died that come to more than the chargeable gains for the tax year in which the death occurred, the excess losses may be set against the gains of the previous three years, beginning with the most recent.
You cannot set unused losses for the period before death against gains made afterwards.
The annual exemption (the gains you can make before you pay Capital Gains Tax) is available to the personal representatives on disposals made from the estate in the period from the date of death to the following 5 April and in the two tax years following the year of death, but not after that.
The personal representatives are liable to pay any Inheritance Tax that is due on the estate.
When you apply for legal recognition to be a personal representative, you may have to fill in an Inheritance Tax Account. The Account asks you to give details of:
HMRC Trusts & Estates Inheritance Tax uses the Account to work out how much Inheritance Tax must be paid. As personal representative, you must sign it as a correct and complete record of the estate. Inheritance tax is payable if the value of the estate is above the 'nil rate band' or 'threshold' announced each year in the Budget. The Inheritance Tax threshold from 6 April 2009 is £325,000.
If you don't want to use a solicitor, you can get information about probate from the Probate Service (Opens new window).
You will need to attend an interview at the Probate Registry, usually within about three weeks of sending the forms, and if there is any Inheritance Tax to pay, you may need to pay at least some of the tax before you can get a grant of representation. The interviewing officer will give you an estimate of how long it will take for the grant of representation to be prepared and sent to you.
The Probate Registry is not able to give you any legal advice about how you should administer the estate.
The forms you need to fill in to apply for probate or confirmation depend on where the deceased lived.
You generally have to pay at least some of the Inheritance Tax before you can get legal recognition. But you do not have to pay tax on some important assets, for example land and houses, until six months after the end of the month in which the death occurred.
If you have any specific enquiries about Inheritance Tax or probate, or want paper copies of the probate or Inheritance Tax forms contact the Probate and the Inheritance Tax Helpline.
Please note HMRC cannot give you legal advice about how you should administer the estate.
If you stand to benefit from an estate, the personal representative, or the solicitor acting, will tell you about your entitlement. If they cannot find the beneficiaries, they will place an advertisement in the press asking for information about them.
This depends on how you benefit from the estate. You may be entitled to:
If you benefit from a foreign estate, special tax rules apply, which are not explained here. You should let HMRC know what you receive from the foreign estate as soon as possible.
A legacy is usually a sum of money or a specific asset that is left to you under the terms of the deceased person's will.
The residue of an estate is what is left after the payment of debts, expenses, taxes and legacies (and in a Scottish estate, after payment of legal rights and prior rights).
Usually you will not have any Income Tax liability when you receive a legacy, unless it:
For each tax year during which the estate is being administered, the personal representatives have to calculate the residuary income of the estate. They do this by deducting certain expenses from the income received by the estate. They may pay out the share(s) of that income to the residuary beneficiary(ies) during the administration period, or they may wait until the administration is completed before doing so. If you get a payment from the personal representatives during the administration of the estate, it is treated as part of your income for the tax year in which you receive it. For any given year, the estate income that you must put on your personal tax return will be the lesser of:
When the personal representatives complete the administration of the estate they will pay out the balance of income due to the residuary beneficiaries. If no payments have already been made to you, all the income is your income for the final year in which the administration of the estate ended.
If you get a payment from the personal representatives during the period of the administration of the estate, it is treated as part of your income for the tax year in which it is paid to you.
When the personal representatives wind up the estate any income that is payable to you is treated as your income, if it has not already been treated as your income for an earlier year.
The personal representatives may be able to exercise a discretionary power in choosing who can receive payments from the estate.
If you are entitled to receive payments from the estate only because the personal representatives exercise a discretion in your favour, any income that is paid to you is treated as part of your income for the tax year in which it is paid to you.
The part of the estate you receive in respect of your legal rights will normally be paid to you with interest. You will receive the interest without deduction of tax (unless you usually live outside the UK), and the interest is your income for the year in which it is paid to you. You must report it even if you are not sent a tax return.
Income from the estate that the personal representatives pay to you is treated as having borne Income Tax already. But you may have to pay more tax if:
In either case, you must let HMRC know. If you get a tax return you should report the income there. If you don't, you need to tell HMRC by 5 October after the end of the tax year in which you first receive the income, or as soon after that as you know about it.
If you are not liable to tax, or are liable only at the starting rate for savings income, you may be entitled to a repayment of some or all of the tax on this income. Whether or not you are entitled to a tax repayment, you should always show this income on your tax return if you are asked to complete one. If you think you can reclaim some tax, but you don't receive a tax return, you should contact HMRC as soon as possible.
Whenever you receive a payment from the personal representatives you should ask them for a written statement of income from the estate. They may use form R185(Estate Income) for this purpose. This will show you:
Yes, but only if you are liable to tax at the higher rate. For further information about the special tax relief that is available contact the Deceased Estates Helpline.
The transfer of an asset to you under the terms of a will or the rules of intestacy is not a chargeable occasion for Capital Gains Tax. You are treated as acquiring the asset on the date of death at its open market value on that date. If you later dispose of that asset, this will be a chargeable occasion for Capital Gains Tax. In these circumstances the date of death value will be used as the acquisition price.
This will depend on the circumstances. A will may direct that a particular legacy, instead of going directly to an individual, be held on trust. In this case the trust will be treated as having commenced with effect from the date of death of the deceased person.
A trust may commence at a later date either during or at the end of the administration period. Once the administration of an estate is complete and the personal representative's administrative functions are over, what is left of the deceased's property after all debts, taxes and legacies have been paid may not necessarily pass directly to the ultimate beneficiaries. Instead, the balance of the estate may pass into a trust or settlement. In these circumstances, it is up to the personal representative to determine whether or not they need to wait until the administration of the estate is complete before they transfer some of the assets comprised in the residue over to the trustees. The trust will commence when assets are transferred to the trustees or when the administration has been completed, whichever event happens first.
A trust may be created by either:
The responsibilities of trustees are different from those of personal representatives, although often the same person(s) will take on both roles. A number of trustees can be appointed with collective responsibility for managing the trust.
Trustees are required to manage the property held on trust and any income generated by that property, according to the terms of the will or the rules of intestacy and general trust law. Your responsibilities continue until you retire as trustee or the trust ends.
The personal representatives should already have told HMRC that a trust is to be set up under the terms of the deceased's will or the rules of intestacy. You will then be asked for further information about the trust.
The Tax Office that you will deal with as a trustee will normally be the same HMRC Trusts & Estates office that dealt with the estate during the period of administration. If you have not heard from them, you must contact them as soon as possible.
In your capacity as trustee, you are liable to tax on income generated by the trust property. You must inform HMRC if this is the case. Income arising to you in your role as trustee is taxed separately from income arising to you in your personal capacity, such as income from your employment, or from your own bank or building society accounts.
When a personal representative transfers an asset to a beneficiary, there is no Capital Gains Tax liability on the transfer. The same applies when the personal representative transfers an asset to trustees.
If you are the trustee of a trust created under the terms of a person's will or the rules of intestacy, you are treated for Capital Gains Tax purposes as acquiring the asset on the date of death, at its market value on that date. This applies where the transfer is a formal transfer to a different person, or where, on completion of the administration, the same person continues to hold the property as a trustee or on behalf of the trustees.
You may be liable to Capital Gains Tax if trust assets are disposed of, or if beneficiaries become entitled to them later.
Depending on the terms of the trust, Inheritance Tax may arise on the value of the assets in a trust every ten years or when they are distributed. The liability will only arise if the value of the assets on which the charge arises exceeds the Inheritance Tax threshold which from 6 April 2009 is £325,000.