What You Need To Know About Death and Taxes
11th July 2016
When it comes to giving the taxman his due, being dead is no excuse. On the other hand, if you die while HMRC still owes you a refund, that's no reason to let them off the hook. Taxes on inheritance can be confusing, and honestly, they're the last thing you want to be worrying about. Here's what you need to know to make sure they aren't - well - the last things you end up worrying about.
So, let's start by assuming you're not dead yet yourself. Suppose instead you're sorting out the final financial arrangements for someone who is. It's just as easy for a dead person to have paid the wrong tax as a living one.
To get it sorted out one way or the other, you usually need to get in touch with the taxman directly. You can use the Tell Us Once service in England, Scotland or Wales for this. Northern Ireland has its own system, called the Bereavement Service. Either way, you should be able to get the deceased's tax calculation straightened out.
Filing Self Assessment For The Deceased
In some cases, you're going to need to file a Self Assessment tax return to sort it all out. For instance, you'll do this if the deceased was self-employed, or filed their own returns for other reasons. If you don't know whether they did or not, HMRC should be able to tell you. You'll need to have their National Insurance number to get the information, of course.
It's possible that someone might continue to have money coming in for a while after they've died. Maybe they had income from property rental or savings and investments. Whether or not there's tax to pay depends on where the money's coming from. Again, though, the taxman will usually let you know if he thinks he's due a bite of it.
If there's income from investments or savings in the UK, you might find yourself filing a Self Assessment tax return on the deceased's behalf. The same generally applies to things like rental income. Similarly, if the money's coming in from abroad, then it won't already have been taxed. Either way, the taxman's going to want to know what's coming in, and where it came from.
Capital Gains Tax for the Deceased
It's not all bad news when you die, though. You can merrily kick the bucket secure in the knowledge that you're not getting hammered with Capital Gains Tax. Property or assets that you didn't sell before you die don't get taxed. At least, they don't unless they then get sold during probate. In that case, if they've gone up in value since you died, then there's tax to pay. The same thing happens if you inherit an asset yourself then sell it after it goes up in value.
What is Inheritance Tax and how is it Paid?
Speaking of inheritances, this is where a lot of people get confused. When you die, your money, assets and property are called your "estate". If there's Inheritance Tax to pay, it comes out of the estate before it goes to the people inheriting it. If the taxman doesn't get his cut within six months of the person's death, he starts charging interest. The less awful news is that Inheritance Tax only applies over £325,000. Anything under that doesn't get taxed at all. Again, you usually won't have to pay anything until after you've actually got the inheritance.
Some people try to get around Inheritance Tax by giving away their money and property before they die. Any "gifts" you get from someone in the seven years before they die can still be taxed, though.There are some fiddly rules and exemptions around this, so it's worth getting professional advice.
What Happens Next?
Once you've actually got your inheritance, your tax situation depends a lot on what you do next. If you invest it and start making money out of it, you'll obviously have to pay Income Tax. If you simply sell it you could be looking at Capital Gains Tax, assuming it's gone up in value. Either way, you're going to need to know where you stand before making any big decisions.
Weird as it sounds, when it comes to taxes, death can end up costing you more than just your life. Whether you're expecting to inherit, or looking to leave something behind, get in touch with RIFT. There are only three certainties in life. The first is that RIFT are the UK's top experts in keeping HMRC honest. You already know the other two.
If you need any help with your self assessment tax returns, or if you have any questions then get in touch now on 01233 628648, talking to us on LiveChat, joining us on Facebook, or click the button below to check if you need to do self assessment.