The death of a loved one is usually one of the most distressing times in our lives and sorting out the financial affairs of the person who has passed away can be stressful and overwhelming.
Generally, when someone dies, there is a timeline of things that need to happen in the days and weeks afterward. You can read more about this in our guide to What to do when someone dies.
Sorting out taxes plays an important part in preparing for and carrying out the probate process, during which the possessions, money and property of the person who has died (known as their estate) are added up and verified, any taxes or debts are paid and what’s left is distributed to their beneficiaries.
Here we look at what taxes may need to be paid after someone dies, and how they are calculated.
Things to be aware of
When someone dies they usually choose a person (or people) to be their executors. The executors are legally responsible for dealing with the estate of the person who has died. If someone has died without a will and therefore hasn’t chosen anyone to be their executor, you can volunteer to take on the role of administrator, which has similar responsibilities to an executor. You can find out more about this in our guide to Sorting out an estate when someone dies without a will.
If you have been chosen to be someone’s executor, and are looking to start the process of sorting their finances, you’ll need to apply for a document called a ‘grant of probate’, which shows that you have the authority to access money and share out assets. It involves completing a probate application form and an inheritance tax form, which can both be done online. You can get help filling in these forms from the Government’s probate and/or inheritance tax helplines. There will be some tasks that you should be able to delegate to others, but as the executor, you will have overall responsibility for managing the process.
The application process for the grant of probate can seem counterintuitive as you will need to provide a valuation of the estate and calculate any Inheritance Tax that might be due before you have any real access to the accounts of the person who has died. The point of the grant is to allow you to move money around and distribute it, but until you get this you can ask many banks and organisations for a ‘probate value’, which will give you the total amount that is in the account.
It will also help you if you can gather as much information for the person who has died, including their:
- Date of birth
- National Insurance number
- Unique Taxpayer Reference (UTR) – you can find this on letters or payslips from HMRC
- Driving licence number
- Vehicle registration number
- Passport number
- The date of death
- Bank accounts or statements
- Investment portfolios
- Full address
Last employer or pension provider’s name and address
This list isn’t exhaustive, but it should cover some of the key documents you will be asked for when organising and paying taxes for the person who has died. GOV.UK includes a comprehensive guide on how to value an estate, but you should seek professional advice if you’re not confident going it alone.
What do I need to do first?
Working out tax after someone has died falls into two main categories: making sure the right amount of income tax has been paid up until the date of death, and calculating tax affecting the estate such as Inheritance Tax and possibly Capital Gains Tax.
The first thing you need to do when trying to sort out someone’s taxes after their death is to notify a number of government departments that the person has passed away, followed by banks and other organisations.
This will enable them to update the information for the person who has died, give you a valuation of any money they hold and advise you on your next steps. If you have been named as the Executor of the estate, this will also allow you to ask for probate valuations (this is essentially what the value of the account was at the date of death) and potentially gain access to any electronic accounts.
Notify government departments
If you live in England, Scotland or Wales, the easiest way to do this is through the government’s Tell Us Once service. To use this service you will need to get a unique reference number from the registrar when you register the person’s death. This service will contact a range of government departments including:
- HMRC – this will deal with personal tax, benefits and tax credits.
- Department for Work and Pensions – This will cancel benefits and entitlements such as Universal Credit or state pension
- Passport Office – This will cancel a British passport
- Driver and Vehicle Licensing Agency (DVLA) – to cancel a licence, remove the person as the keeper of up to 5 vehicles and end the vehicle tax
- The local council – to cancel Housing Benefit, Council Tax Reduction, a Blue Badge, inform council housing services and remove the person from the electoral register
- Veterans UK – to cancel Armed Forces Compensation Scheme payments
If you live in Northern Ireland, you will need to contact the Bereavement Service to report the death of someone who was receiving social security benefits.
Notify banks and other organisations
It’s likely that the person who has died will have a number of organisations that need to be contacted to notify them of their death to either cancel the account or subscription, get a valuation of the amount held with their organisations, identify any debts or loans and to help you work out the value of their estate. These may include:
- Banks and/or building societies
- Savings providers
- Mortgage, loan, credit card and/or store card providers
- Insurance companies – This may include, for example, home, car, travel, private medical, critical illness and/or income protection insurance.
- Pension provider
- Any other financial company the person who has died had an agreement with – such as a car leasing agreement, or other loans.
- Social services
- Utility providers – Including gas, electricity, water, and mobile phone contract (most providers will cancel when asked if the contract holder has passed away).
- GP, dentist and anyone involved in their medical card
- Any subscription services they may have had
There a couple of services that will help with this process:
- The Death Notification Service – This allows you to notify a number of banks and building societies of a person’s death, at the same time. Not all banks and building societies are signed up for this, so you will need to check the specific banks covered.
- The Bereavement Register – this will ensure their details are removed from any mailing lists
Once you’ve contacted the relevant government departments and organisations you should have a rough idea of the financial situation of the person who has died, their bank balances, income, assets, loans, debts and so on. With this information you will then need to look at the following:
Is any income tax owed?
The person who has died may have paid too much or too little income tax over the tax year, so you will need to make sure that they have paid the right amount up until the date they died.
If you have already contacted HMRC through the Tell Us Once or Bereavement Service, they will send you (the executor) a letter detailing exactly what is needed, if there is anything outstanding or if you need to fill in a Self Assessment tax return if the person who has died usually did one.
This process can be complicated if the person who has died had multiple sources of income as you will need to identify each of these for HMRC to see if there are any outstanding payments or rebates. This is where it is very important that you have contacted banks and organisations that the person who has died has used to make sure you have as clear a picture of their income as possible.
If there are income tax payments to be made, these will be taken from the estate of the person who has died. Some banks will make the transfer directly to HMRC so it is worth checking whether this is possible. Equally, if there are any tax rebates to be made, they will be paid to the estate.
These taxes will need to be settled by the end of the tax year, with all tax returns needing to be submitted by 31st January of the following year. For example, a tax return for the tax year 2019/20 needs to be filed electronically by 31 January 2021.
If the person who has passed away had any savings, dividends, owned and rented out properties or owned a business, they may have received income after their date of death. This amount will be viewed differently from the income they may have earned before they died and needs to be treated separately.
Any income that they have received after their date of death but before the estate is divided will fall into the ‘Period of Administration’.
You (the executor) will need to report this to HMRC so they can be taxed accordingly, as usually, this type of income doesn’t have tax applied to it before it’s received. After the date of death, there is no personal allowance available so all income is taxed at the following rates:
- Savings income: 20%
- Dividends: 7.5%
- Other income such as rents or business profits: 20%
If the amount of tax you need to pay is less than £10,000 (any Capital Gains tax will add towards this sum) you can pay through the informal payment procedure. This procedure can only be used once and only after the period of administration has ended when all the income and chargeable gains of the period are known. This doesn’t affect the distribution of money to beneficiaries during the administration period.
If the amount of income tax owed is over £10,000 or if the estate was worth more than £2.5 million at the date of death, the estate will be viewed as a complex case and you will need to go through a Self Assessment process. HMRC will be able to advise on the steps you will need to take for this process. If you need any help, HMRC has a Bereavement Tool that will help you with the process, or you can contact the HMRC Bereavement Helpline on 0300 200 3300.
Working out Capital Gains Tax
Capital Gains Tax is a tax on the profit you make when selling an item or property. It can be a complicated topic, but it is useful to know that the liability for Capital Gains tax will die with the person who has died.
When you inherit an item, you will receive it at its probate value (the value it was given during the probate process). You will only need to pay Capital Gains Tax for any subsequent value increase if you decide to sell the item or property and the profit you make exceeds the Capital Gains Tax free allowance, which for the current 2021/22 tax year is £12,300.
During the probate process, it may be necessary for the executor to sell certain items or property to release money to cover debts, taxes and payments from the estate. If any item or property has increased in value between the date of death and the date it is sold during probate, a tax return will need to be submitted and Capital Gains Tax may need to be paid.
Inheritance Tax is a tax on the estate of the person who has died and is applied before the estate is divided between the beneficiaries. Not all estates will need to pay Inheritance Tax and it is only applied to the value of their estate over the £325,000 Inheritance Tax threshold.
Any assets over and above the threshold will be taxed at 40%. So if the value of an estate is £500,000, £325,000 will be tax free, and £175,000 will be taxable at 40%, meaning that £70,000 would be due in Inheritance Tax (40% of £175,000).
Working out the amount of Inheritance Tax that needs to be paid is an important step in applying for the grant of probate, as this is one of the key features of the application process. If the estate is relatively straightforward, this can sometimes be done with a brief summary form (IHT 205). However, in more complex cases, you may find you have to fill in a full version of the IHT 400 form.
Inheritance Tax can be confusing, but rising house prices mean more and more of us risk landing our loved ones with a tax bill when we die. It’s therefore important to be aware of a number of exemptions that could cut thousands of pounds off any Inheritance Tax liability. These exemptions include:
Any assets passed directly to the husband/wife or civil partner of the person who has died are exempt from Inheritance Tax
Main residence nil-rate band: This is an additional £175,0000 allowance which can be used if the person who has died has left a residence, or the sale proceeds of a residence, to his or her direct descendants. When combined with the standard £325,000 allowance, this effectively raises the threshold when you start having to pay inheritance tax to £500,000
- Gifts: there are various allowances you can use to make gifts free from Inheritance Tax. For example.These include being able to give away £3,000 each tax year without this being added to the value of your estate. Our article Which gifts are exempt from Inheritance Tax? explains everything you need to know.
Inheritance Tax is due six months after someone passes away, and paying it late means being charged additional interest, so it’s worth trying to pay some or all of the tax before then (the tax on houses can be paid in instalments). You can find out more about how Inheritance Tax works in our guide to Understanding Inheritance Tax.
Typically, you’ll need to pay at least some of the tax before you can apply for a Grant of Letters of Confirmation. Don’t panic if you don’t have the funds to do this yourself. Most banks will allow you to apply to have the tax paid from the account of the person who has died straight to HMRC, even if you cannot access these funds directly yourself. Alternatively, if you are planning to sell assets from the estate in order to pay the tax, you can ask HMRC for a Grant of Credit to do so.
Where to go for more help
The HMRC Bereavement Tool will help you with the process, or you can contact the HMRC Bereavement Helpline on 0300 200 3300
You may need the help of a probate specialist or solicitor. There is no legal requirement to use one, but if you’re not feeling confident about the process, a solicitor could help give you peace of mind, but they do come at a cost. It might be worth budgeting a few thousand pounds for these services if you think a specialist would be useful. If you don’t already have a solicitor, you can find one through the Law Society’s free Find a solicitor service. Read more about how to decide if you need this in the article When to use a probate solicitor or specialist
If you are going through the process of organising someone’s finances after they die without the help of a solicitor, HM Courts and Tribunals Service has a guide for this process. You can read and download the guide here.
Have you come through the recent death of a loved one and had to sort out their financial affairs and taxes? Do you have any additional suggestions that might help others? If so, we’d be interested in hearing from you. You can join the money conversation on the Rest Less community or leave a comment below.