Administering an estate – what taxes do you need to pay?

The death of a loved one is a stressful time. Tax might be the last thing you want to think about, but if you don’t you could find yourself in trouble with HMRC. If you’re the executor or personal representative, you need to settle any taxes owed before you distribute the estate.

Here we talk about the main financial issues to consider when administering an estate and how to avoid getting tied up in tax when dealing with loss.

∙   Have tax affairs been dealt with to the date of death?

Was the deceased up-to-date with their taxes or is there any outstanding tax due to or from the estate? You may have to file a tax return on their behalf covering the period from the start of the tax year up to the date of death.

∙   Is the estate subject to Inheritance Tax?

Estates valued at over £325,000 trigger Inheritance Tax at 40%. If everything is left to the deceased’s spouse or civil partner, no Inheritance Tax is payable. If a home is passed to the deceased’s children or grandchildren, the threshold increases to £450,000. Some other reliefs and exemptions apply; it’s best to get advice from a professional.

∙  Is a corrective account required?

If something happens during the administration period which affects the Inheritance Tax position, for example, if further assets are found or the value of the estate has not been correctly calculated, it could be necessary to complete a Corrective Account and pay any additional tax due, or reclaim any tax overpaid.

∙  Is Income Tax due for the period of administration?

The period of administration runs from the day after the death to the date the estate is finalised (distributed). Income Tax applies to income the estate receives in the period of administration.

If the total Income Tax and Capital Gains Tax due in this period exceeds £10,000, you will need to file a tax return for the estate (this is separate from any tax return that needs to be filed on behalf of the deceased).

Where the estate is not deemed to be ‘complex’ you may be able to communicate informally with HMRC, instead of filing a return.

HMRC has introduced a temporary arrangement whereby executors or personal representatives do not have to submit returns where the estate’s only source of income is savings interest and the tax liability is below £100.

∙  Have any gains been made on the estate during the administration period which could trigger Capital Gains Tax?

The CGT annual exemption threshold applies for the tax year in which the deceased passed away and the following two years. If the administration period continues after this time there’s no tax-free allowance for capital gains.

The current exemption threshold for 2018/19 is £11,700. Any gains made through the sale of the deceased’s assets above this amount could incur CGT.

For more information, speak to our Wills and Probate team using our contact form.