How do you calculate a deceased’s person’s tax? Simon Page, an executive in the probate department at Stephensons, explains what you need to know about the likes of inheritance tax and Capital Gains Tax.

How do you calculate a deceased person’s inheritance tax?

Inheritance tax (IHT) is calculated based on the value of the deceased’s estate at the date of death, which broadly comprises of property, possessions, investments and cash, the value of any gifts made within seven years of death in which the deceased retained an interest and any qualifying interest in possession trusts. Then any available inheritance tax nil rate band and residential nil rate bands available are deducted:

• the IHT nil rate band is currently £325K less the value of any chargeable gifts made within seven years of death
• the residential nil rate band (which is only available if leaving property to descendants, including step and foster children, and their spouses/civil partners or widow(ers)/surviving civil partners) is £175K although this allowance tapers down if the deceased’s estate is worth more than £2 million, eventually to zero if the value of the estate is £2.35 million or above

The personal representatives (the persons responsible for managing the deceased’s estate) need to establish the date of death values of all the assets and liabilities within the estate, with IHT payable at a rate of 40 per cent of the excess after deducting available IHT reliefs and exemptions.

Married couples and civil partners can transfer their assets tax free to the surviving partner. The personal representatives of the surviving partner, the second to die, can then utilise the proportion of any unused nil rate band allowances of their predeceased partner.

The recipient of a gift made by the deceased within seven years of death is primarily responsible for paying any IHT on the gift.                                                                                               

How do you pay a deceased person’s IHT?

The personal representatives will need to complete the HMRC form IHT400 which records all the assets and liabilities and ancillary information regarding the estate. For estates where IHT is not chargeable a simpler form, an IHT205 is completed.

The IHT is payable from the estate by the personal representatives by the end of the sixth month following the month of death. There is an option to pay IHT by ten yearly instalments, with interest being charged by HMRC on the balance of unpaid tax, for the portion of the estate represented by land and property; unquoted shares which gave the deceased control of a company and in certain other circumstances and a business or an interest in a business.

The Probate Registry will not issue a grant of probate until they have received confirmation from HMRC that the IHT has been paid by the estate.

Income Tax and Capital Gains Tax pre-death

It is necessary to establish if the deceased has a tax liability owing at the date of death which is a debt of the estate or a tax refund owing which is an asset.

In the case of taxpayers who needed to file self-assessment tax returns, this will involve the personal representatives completing a tax return covering the period from the preceding 6 April to the date of death or instructing a professional to do so.

If the taxpayer was not required to file returns under self-assessment the personal representatives will still need to review the position. For example, any undeclared income or capital transactions made pre-death for which an Income Tax or Capital Gains Tax liability arises.

A deceased taxpayer not registered for self-assessment may also need the tax position to the date of death to be agreed with HMRC who should be requested to review the tax position and issue a tax computation. This is typically where the main sources of income are taxed under PAYE.

The personal representatives may also be asked to complete a tax return to the date of death. Reporting chargeable event certificates on life policies triggered by death and claiming top slicing tax relief are a common reason.

Tax on income received by the estate

It should be noted that income received by the estate since the date of death up until the administration of the estate has been finalised is taxable.

Savings income and rental income is taxable at a flat rate 20 per cent and dividends are taxable at 7.5 per cent. No allowances are available to offset against income and no higher rates of tax are applied.

If an estate is valued over £2.5 Million, has an overall tax liability during the administration period of in excess of £10,000 or more than £500,000 is realised from the sale of estate assets in any one tax year, then the personal representatives will need to file self-assessment Estate and Trust Tax Return for the administration period.

Otherwise the income and/or capital gains tax liability can be reported and paid over to HMRC via their informal payment procedure which is generally by letter and then paying the tax over upon receipt of a HMRC reference.

Capital Gains Tax

An exemption equivalent to the personal capital gains exemption (£12,300 for 2021/22) is available to the personal representatives in the tax year of death and the following two tax years.

The rate of Capital Gains Tax payable on taxable gains is 28 per cent on residential property and 20 per cent on other assets.

No Capital Gains Tax liability arises when an asset is transferred by the personal representatives to beneficiaries of the estate who obtain the asset at the market value at the date of death (probate value). If the value of the asset has fallen since the date of death the loss made by the personal representative on disposal cannot then be utilised by the beneficiary. However, if the asset is first assigned to the beneficiary and then sold at a loss the beneficiary is entitled to utilise that loss for capital gains purposes.

In instances where capital gains are likely to exceed the available exemptions in the estate it may often be advantageous for the assets to be assigned to the beneficiaries to sell in their personal capacities and thereby utilise use their own personal exemptions and possibly lower tax rates.                

About the author

Simon Page is an executive in the probate department at the national law firm, Stephensons.

See also

The duties of an executor: what to do when someone dies

How to pay inheritance tax (IHT)

How do nil rate bands reduce inheritance tax?

What you need to know about the right of survivorship

Find out more

Inheritance Tax account (IHT400) (GOV.UK)

Inheritance Tax: return of estate information (IHT205) (GOV.UK)

Self Assessment: Trust and Estate Tax Return (SA900) (GOV.UK)

Inheritance Tax (GOV.UK)

Pay your Inheritance Tax bill (GOV.UK)

Image: Getty Images

Publication date: 23 August 2021

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.