What taxes need to be paid when someone dies?
It is the Personal Representative’s responsibilities to settle the Tax Affairs of the deceased up to the date of death, as a result of the death and after death.
This responsibility is an onerous one. If the Personal Representative distributes without settling the Tax Affairs he will be personally liable for any such tax.
If the Personal Representative fails to claim any repayment due to the estate, he will be personally liable to refund the loss to the estate.
To avoid personal liability and ensure the tax affairs are dealt with correctly, it is important to seek legal advice.
There may be three different taxes to consider – Income Tax, Inheritance Tax and Capital Gains Tax.
Tax Affairs up to date of death
If the deceased filed a Tax Return during their life then the Personal Representatives will have to file one for the period from 6 April to the date of death.
The Tax Office that dealt with the deceased’s tax affairs should be notified immediately of the death.
A Personal Representative can claim any overpayment of income tax for the tax year in which the deceased died and for the previous 4 years.
You will need to gather together all the records of the deceased’s affairs up to the date of death, including:
- Bank Statements for current and savings accounts;
- Building Society pass books and annual statements;
- Dividend vouchers;
- National Savings Bonds and Certificates;
- Pension or salary payslips;
- P60 for the last Tax Year;
- Last year’s accounts or business records if the deceased was self-employed.
There are strict deadlines for submitting tax returns. Failure to comply with the deadlines means there are late payment penalties to pay and interest on anything the deceased owed. The penalties and interest maybe a personal liability of the Personal Representative.
Tax Affairs after Death
Personal Representatives also have to settle the tax affairs of the deceased from the date of death to the date of completion of the administration of the estate, known as “The Administration Period”.
In certain circumstances, a Trust and Estate Tax Return has to be completed.
Personal Representatives are chargeable to income tax on any income received during the administration period at the basic rate (currently 20%).
During the administration period Personal Representatives are responsible for:
- Keeping proper records of all financial transactions and these must be kept separate from those relating to transactions up to the date of death;
- Reporting on any untaxed income to the Tax Office;
- Reporting on any capital gains to the Tax Office;
- Paying any tax due;
Most income will have had tax deducted at source but there may be income which has not been taxed, for instance:
- Rents from property;
- Interest from National Savings Bonds or Certificates;
- Income from abroad;
- Income on funds held by a solicitor on their client account during the period of administration.
The Personal Representative must finalise the tax affairs before the estate is distributed.
The Tax Office can be asked to agree the liability for the administration period and tax can be paid early. By taking this step the estate can be wound up.
Personal Representatives do not have any personal allowances to offset against income received.
Personal Representatives may be asked by beneficiaries to provide a written statement of income and the tax deducted from this income on Form R185 (Estate Income).
CAPITAL GAINS TAX
Capital Gains Tax at the date of death
Capital Gains Tax is not paid because of the deceased’s death or on assets held at the date of death.
If the deceased made any capitals gains prior to the date of death this needs to be included in the Tax Return for the deceased for the period up to the date of death.
When Personal Representatives take control of the deceased’s assets, they are deemed to acquire them at the market value as at the date of death.
Capital Gains Tax due after the date of death
If the Personal Representative sells any assets they are liable to capital gains tax on the increase in value during the period of administration.
The transfer of assets to a beneficiary under the terms of the Will or the Rules of Intestacy is not regarded as a disposal for capital gains tax purposes. The beneficiary is treated as acquiring assets on the date of death, at the market value on that date.
If Personal Representatives sell any assets, any capitals gains made will need to be declared to the Tax Office and the capital gains tax due will be paid out of the estate as a debt due from the estate.
Currently the capital gains tax free allowances for Personal Representatives is £10,900 (2013/2014) and for the next tax year (2014/2015) this will be £11,000. This allowance is available from the date of death to the following 5th April and for the next 2 tax years, but ceases after that date.
The rate of capital gains tax for Personal Representatives is currently 28%.
Personal Representatives are liable to pay Inheritance Tax where the value of the assets in the estate exceed £325,000. This threshold is subject to annual review in the budget.
When an application is made for a Grant of Representation, Personal Representatives have to complete an Inheritance Tax Account known as “Return of Estate Information” which details:
- The assets owned by the deceased and their value as at the date of death;
- The debts and liabilities as at the date of death including the funeral expenses;
- The gifts made by the deceased 7 years before they died;
- The assets owned jointly with another or under a Trust.
The Personal Representatives sign the Inheritance Tax Account declaring that all the information is correct and complete. If Personal Representatives fail to carry out full enquiries, complete the account incorrectly or provide false information, they could face financial penalties or prosecution.
It is very important that Personal Representatives seek advice before completing and filing the Inheritance Tax Account.
What is the next step?
At Macks we can explain the taxes to be paid and what this means to you as a Personal Representative, what you need to do and what forms and returns you need to complete.
We strongly recommend a face-to-face meeting with one of our specialist Solicitors who will be able to explain things in greater detail and advise you on what to do next. The initial meeting would be free of charge and will explain the assistance we can provide to administer the estate and ensure you meet your responsibilities, do not incur personal liabilities or penalties.