Dive into the world of PAYE investigations. Uncover the facts, implications, and insights in this informative blog
Everything you need to consider when dealing with a deceased person's estate and paying the relevant taxes - with or without a will.
Did the deceased have a Will?
If the deceased had made a Will this should ensure that the estate is divided amongst their beneficiaries in accordance with their wishes. However, if the deceased has not left a Will the law decides who inherits the estate. This is called intestate. This can result in a distribution of assets that would not have been the wishes of the deceased and can be especially problematic for cohabitees (a couple who live together but are not married and have not entered into a civil partnership).
It should be noted that even when a valid Will is in place arguments between family members, beneficiaries or personal representatives can arise. Any disagreements must be sorted out before the affairs of the person who died can be settled. This can sometimes be so contentious that it has been left to the Courts to decide if a Will made by a deceased person was valid or invalid.
A Will can also be changed after death. This can be done by what is known as a Deed of Variation. This can be done up to two years from the date of death and is most often done to reduce Inheritance Tax (IHT) liability, help the tax position of a beneficiary or help someone who was left out of the Will. A Deed of Variation can only be executed upon the agreement of all the beneficiaries. It is more complicated if children are involved as they cannot themselves consent to changes.
If someone dies without a Will or any known family their property passes to the Crown as ownerless property. This is known as ‘bona vacantia’.
IHT is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain trusts and gifts. The rate of IHT payable is 40% on death and 20% on lifetime gifts. IHT is payable at a reduced rate on some assets if one leaves 10% or more of the 'net value' to charity of their estate.
There is a nil-rate band, currently £325,000, below which no IHT is payable. In addition, there is an IHT residence nil-rate band (RNRB) which relates to a main residence passed down to a direct descendent such as children or grandchildren. The RNRB of £175,000 (where available) is on top of the £325,000 inheritance tax nil-rate band.
The amount inherited by a spouse or civil partner is usually exempt from IHT. The situation is more complicated if the surviving spouse or civil partner is not domiciled in the UK.
Many estates are classed as an ‘excepted estate’. These are estates that don’t have any IHT Tax to pay. There are special rules for handling an ‘excepted estate’.
An estate will usually be referred to as an excepted estate where:
- The total value of the estate does not exceed the Nil Rate Band of IHT, currently £325,000. Any Potentially Exempt Transfers made by the deceased must also be taken into account. In the case of an estate where the first spouse / civil partner has already died, the estate is valued at less than £650,000.
- The gross value of the estate does not exceed £1,000,000 and there is no tax to pay because either all assets were left to the deceased’s spouse or civil partner living in the UK or to a ‘qualifying’ charity.
- The deceased was domiciled outside the UK at the date of their death and had never been domiciled (or deemed domiciled for IHT purposes) in the UK during their lifetime and the gross value of their UK estate does not exceed £150,000.
The rules about excepted estates are concerned with gross values so in most cases the treatment of liabilities does not have any impact. If the estate is not an excepted estate a full IHT account must be completed.
If the deceased’s estate is worth less than £5,000 or the deceased owned everything jointly with their spouse or civil partner, probate is not usually needed. This is called a ‘small estate’.
Probate is almost always required when the deceased’s estate includes property or land held in their own name or jointly under a tenancy in common arrangement.
When someone dies, the term probate is used to describe the process for administering the deceased person’s estate. The probate process deals with the legal and financial aspects of the deceased in order to resolve all claims and distribute the deceased person’s property in accordance with their final wishes.
The probate process can be handled by an authorised probate professional or alternatively by a relative or friend of the deceased acting as an executor or administrator. Probate is the term used for this process in England and Wales. In Northern Ireland the process is known as ‘grant of probate’ and in Scotland as ‘confirmation’.
We would recommend seeking out someone skilled in handling the probate process for all but the most straightforward cases. We can of course help with all aspects of probate.
This is especially important in situations such as the following:
- The estate has exceeded the IHT threshold and IHT is due;
- There is no Will or issues concerning the validity of the Will have been raised;
- Dependants have been left out of the Will and may make a claim for support;
- The estate continues to receive income;
- The estate includes foreign assets;
- The estate has assets held in trust;
- There are doubts about the insolvency of the estate;
- The estate includes property under a tenancy in common arrangement.
Most probate cases follow the same steps:
- Checking if the deceased had a Will - this normally states who administers the estate. If the person dies without leaving a valid Will (intestate) there are special rules that need to be followed.
- IHT forms need to be completed and the deceased’s estate must be valued before probate can be applied for. This includes identifying all of the deceased’s assets and liabilities and usually paying some or all of any IHT due to HMRC.
- An official copy of the death certificate, the original Will (if any) and any fees due must also be submitted.
- Apply to the probate registry for a ‘grant of probate’ where there is a Will or ‘grants of letters of administration’ where there is no Will.
- The person applying for probate will need to swear an oath confirming that the information they have given is true and promising to administer the estate properly.
- A grant of representation is not always needed if the person who died left less than £5,000 in total or owned everything jointly with someone else. However, some financial organisations may require probate even if only a small amount of money is involved.
- Collect the estate’s assets, e.g. money from the sale of the person’s property.
- Pay any debts, e.g. unpaid loans or utility bills.
- Distribute the estate - this means transferring any assets that the beneficiaries wish to retain and distributing any money due to the beneficiaries.
The time it takes for the probate to be completed can vary substantially and depends on a number of factors. A simple probate case can usually be resolved in around three months whilst more complex cases can take six to twelve months or even longer. This depends somewhat on the financial affairs of the deceased and ensuring that all outstanding issues with HMRC are closed.
HMRC bereavement services
HMRC also has a specialist team that deal with bereavement issues that arise when a taxpayer dies. A separate HMRC team also provides specialist advice on a deceased person’s estate relating to Income Tax and Capital Gains Tax. These teams provide family members or personal representatives with help in finalising the tax affairs of the deceased.