Calculating and paying tax after someone dies
When someone dies, their estate will normally have to pay any tax due before any money is distributed to their heirs. Usually when you inherit something, there is no tax to pay immediately but you might have to pay tax later on. Here’s a guide to what tax you need to pay and when.
- Working out their Income Tax up to the date of death
- Completing their tax return
- Paying tax on income received by the estate
- Is there Capital Gains Tax to pay on the estate?
- How much is Inheritance Tax and who pays it?
- Do I have to pay tax on my inheritance?
Working out their Income Tax up to the date of death
The deceased could have paid too much or even too little Income Tax.
As a result, the deceased’s estate might owe tax to the government, or it could be owed a tax refund.
To make sure that the correct amount of Income Tax is paid, you should contact HM Revenue & Customs (HMRC) so that they can adjust the deceased’s tax calculation.
If the deceased lived in England, Scotland or Wales, you can use the Tell Us Once service to do this. HMRC and the Department for Work and Pensions (DWP) should then contact you about the deceased’s tax, benefits and entitlements automatically.
Completing their tax return
You might need to complete a self assessment tax return if the deceased normally did one.
If you’ve used the Tell Us Once service, HMRC will tell you if you need to fill in a Self Assessment tax return.
If you’re not sure if the deceased regularly submitted a tax return, you should check with HMRC if they did so, and when they last submitted a return.
You’ll need to have the deceased’s National Insurance number to hand when contacting HMRC.
Paying tax on income received by the estate
Any income received after the person’s death, such as rent from a property or income from the person’s business, ‘belongs’ to their estate.
Usually this type of income doesn’t have tax deducted before it’s received.
For this type of income, the executor must report this to HMRC as part of probate, so that appropriate amount of tax is calculated and paid by the estate.
How much Income Tax the deceased’s estate needs to pay depends on where the income is from.
Income from UK savings, investments or property rent
Interest and dividends from UK savings accounts and shareholdings no longer have tax deducted from them before it’s paid out.
This means that you’ll need to complete a self-assessment tax return on behalf of the deceased, and pay the Income Tax from the estate.
If there is rental income from a property in the UK, you’ll need to complete a tax return for the deceased’s estate.
Income from foreign savings, investments or property rent
Income from rent on a property abroad, or foreign business profit and shareholdings won’t have UK tax automatically deducted.
You’ll need to complete a tax return for the estate on this income.
To tell HMRC about any untaxed or foreign income, call their Deceased Estate Helpline on 0300 123 1072 (call charges apply).
If you need help on valuing shares or other assets, contact their Shares and Assets Valuation Helpline on 0300 123 1082 (call charges apply).
Is there Capital Gains Tax to pay on the estate?
The good news is that the estate doesn’t have to pay any Capital Gains Tax on the property or assets that weren’t sold (also known as ‘unrealised gains’) before the person died.
But, if the property or asset is sold during probate and its value rose since the person died, there is usually Capital Gains Tax to pay.
This tax is calculated on how much the increase is since the person’s death.
Beneficiaries inherit the assets at their probate value.
This means that when they sell or give the asset away, they will pay Capital Gains Tax on the increase in value from when the person died to when it was sold or given away.
How much is Inheritance Tax and who pays it?
Inheritance Tax is a tax on the money and property, also known as the estate, of someone who’s died.
Who pays it?
Inheritance Tax is paid out of the deceased’s estate before it’s distributed to the heirs.
The personal representative or administrator of the estate is normally responsible for working out how much Inheritance Tax is due.
They’re also responsible for ensuring that this is paid from money in the estate, or from the sale of assets.
The tax is usually paid within six months’ of the person’s death. If it’s not paid within six months, HMRC starts charging interest.
How much is Inheritance Tax?
Inheritance Tax is due on estates worth more than £325,000.
The rate is 40% of the estate that is above this threshold.
Do I have to pay tax on my inheritance?
If you’re an heir, there’s not normally any tax to pay before you receive your inheritance.
The exception is if you received a gift at some point in the seven years before the person died.
Depending on the value of the gift and when it was given, you might have to pay some tax.
Find out more in Gifts and transfers exempt from Inheritance Tax.
Once you’ve received your inheritance, you might have to pay either income tax, capital gains tax or both, depending on what you do with your inheritance.
- If you invest your inheritance in something that generates an income, or you inherit an income producing asset, such as a rental property, then you’ll need to pay Income Tax on that inheritance.
- If you sell the asset that you inherited and it has increased in value, you’ll need to pay Capital Gains Tax.