Practical considerations in taxing times. What tax is payable on an estate?

If you have been appointed executor of a loved one’s estate, it can feel as though you are expected to carry out an overwhelming number of complicated tasks and there are many things you need to be aware of in order to fulfil their wishes.

As trusted executry professionals, many of our clients come to us with concerns about what taxes are payable on a deceased’s estate, as it is vital that these are calculated and taken into account before beneficiaries’ gifts are confirmed.

Inheritance Tax

The main tax you need to be aware of is Inheritance tax, which is a percentage of the overall estate that needs to be paid. Some of the laws surrounding the payment of Inheritance Tax (IHT) can be complex and technical, and a solicitor is able to offer clear and practical advice on calculating and paying IHT.

What are the exemptions?

Firstly, you need to know that IHT isn’t payable on all estates. As a general rule, it’s only due if the total value of the deceased’s assets is more than £325,000. That means the first £325,000 is free from inheritance tax but any assets over this value will be subject to IHT at 40%. However, there are some key exceptions to this rule you should be aware of and here we will outline the main ones:

•Any assets passing to the deceased’s surviving spouse or civil partner are free of inheritance tax, regardless of the total value;

• If the deceased had a spouse or civil partner who died before them, their unused inheritance tax allowance may be available, meaning the threshold increases to a maximum of £650,000;

• Any assets passing to a registered charity are free of inheritance tax, again regardless of the value;

• If the deceased’s property is left to a direct descendant, an additional residence nilrate band applies. This is currently £175,000, or £350,000 for a couple;

Don’t forget lifetime gifts

It isn’t just the estate of a loved one that can be subject to IHT. You need to bear in mind that it can also be payable on gifts made by the deceased in the seven years before their death. The value of those gifts have to be added into the value of the estate to see if that pushes it over the threshold. Exemptions to this include small gifts (like birthday presents) that can be treated as ‘exempted gifts’, along with gifts given to a spouse or civil partner.

Also, if someone has transferred property or items for less than their actual market value (eg, selling a property to a family member for less than it’s worth), the difference in value is treated as a gift for IHT purposes. However, the amount of tax payable on a lifetime gift depends on how long before the death the gift was made and this reduces over time. Executors should bear in mind that inheritance tax should be paid within six months of the death, or interest will start to apply on the tax due. This means they will need to begin work quickly.

Other taxes on estates

It isn’t just Inheritance Tax you need to think about when dealing with an estate. They also need to calculate any unpaid income tax and capital gains tax that may be due, both from before the person died, and during the period of the estate. Again, these can be complex calculations where a solicitor can help to avoid any delay to the winding up of the estate.

Here to help you

The personal law solicitors at Gibson Kerr are experts in this area and are happy to help you with the process of administering an estate, including calculating and paying any taxes due. They are working remotely and able to hold a telephone or video meeting with you (through Skype, Zoom or similar).