When someone dies, tax will normally be paid from their estate before any money is distributed to their heirs. Usually when you inherit something, there’s no tax to pay immediately but you might have to pay tax later. Here’s a guide on what tax you need to pay and when.
Working out Income Tax up to the date of death
When a loved one has died, they might have paid too much or too little Income Tax. From now on we’ll refer to the one who has died as the ‘deceased’ as this is the legal term you’re most likely to see.
As a result, the deceased’s estate might owe tax to the government or it might be owed a tax refund.
The ‘estate’ is a word that describes everything a person owned and owed when they died.
To make sure that the correct amount of Income Tax is paid, it’s important to contact HM Revenue & Customs (HMRC) as soon as possible so that they can adjust the deceased’s tax calculation.
Tell Us Once and the Bereavement Service
If the deceased lived in England, Scotland or Wales, you can use the Tell Us Once service (Opens in a new window) HMRC and the Department for Work and Pensions (DWP) should then contact you about the deceased’s tax, benefits and entitlements automatically.
If they lived in Northern Ireland, you can use the Bereavement Service (Opens in a new window)Opens in a new windowOpens in a new window and call for free on 0800 085 2463.
For help contacting other organisations about a death such as banks and insurers read out guide What to do when someone dies
Completing a tax return for someone who has died
You might need to complete a Self-Assessment tax return (Opens in a new window) if the deceased normally completed one.
If you’ve used the Tell Us Once service, HMRC will tell you if you need to fill in a Self-Assessment tax return.
If you’re not sure if the deceased regularly submitted a tax return, check with HMRC if they did so, and when they last submitted a return.
You’ll need to have the deceased’s National Insurance number to hand when contacting HMRC.
You can find all the details to contact HMRC on their website
Paying tax on income received by the estate of someone who has died
Any income received after the person’s death, such as rent from a property or income from the person’s business, ‘belongs’ to their estate.
Usually, this type of income doesn’t have tax deducted before it’s received.
For this type of income, the executor of the person’s will must report this to HMRC as part of probate, so that the appropriate amount of tax is calculated and paid by the estate.
How much Income Tax the deceased’s estate needs to pay depends on where the income is from.
It’s worth remembering that the usual tax-free allowances you have when you’re alive such as your personal allowance or your personal savings allowance, don’t apply to your estate when you die.
Income from savings, investments or property rent
Interest and dividends from savings accounts and shareholdings no longer have tax deducted from them before being paid out.
This means that you’ll need to complete a Self-Assessment tax return on behalf of the deceased and pay the Income Tax from the estate.
If there is rental income from a property in the UK, you’ll need to complete a tax return for the deceased’s estate.
You can report ‘simple’ estates by writing to HMRC also known as ‘informal arrangement’. However, if it’s more ‘complex’ then you will need to register online and send a Self-Assessment tax return for the estate. HMRC can tell you what to do when dealing with the estate of someone who’s died.
To tell HMRC about any untaxed or foreign income, visit the Bereavement HelplineOpens in a new window or call 0300 200 3300
Is there Capital Gains Tax to pay on the estate?
The good news is that the estate doesn’t have to pay any Capital Gains Tax on the property or assets that weren’t sold (also known as ‘unrealised gains’) before the person died.
But, if the property or asset is sold during probate and its value rose since the person died, there is usually Capital Gains Tax to pay.
This tax is calculated on how much the increase is since the person’s death.
Beneficiaries inherit the assets at their probate value.
This means that when they sell or give the asset away, they will pay Capital Gains Tax on the increase in value from when the person died to when it was sold or given away.
Visit GOV.UK For more information on calculating and paying Capital Gains TaxOpens in a new window
You need to report and pay any Capital Gains Tax due to HMRC within 60 days for any residential property sold belonging to the estate. The 60 days starts when the sale completes.
Find out more on the changes to Capital Gains Tax for UK property sales (Opens in a new window)Opens in a new window at GOV.UK.
Help with tax if you’re on a low income
If you are on a low income and cannot get the help you need from HMRC, TaxaidOpens in a new window offers free confidential advice about tax.
Or if you're on a low income and aged 60 or over, you can contact Tax Help for Older PeopleOpens in a new window
