Inheritance & Capital Gains Tax

Even after death there are tax issues to resolve. The most common one is inheritance tax which is a tax payable on the estate of the deceased.

Inheritance tax does not apply to everyone. Everyone in the 2020-2021 tax year has a tax-free inheritance tax allowance of £325,000. The allowance will remain the same for 2010-2015.

Inheritance tax is traditionally a loathed tax that people try to avoid. In the past people tried to give away their money before death to avoid inheritance tax. Many loopholes have now been closed.

There are still some ways that you can pass on certain amounts exempt from inheritance tax either while you are alive or after death. Gifts can be made of up £3,000 per tax year. If someone gets married, they can receive up to £5,000 tax-free from parents and £2,500 from grandparents. Anyone else can give them £1,000 without the gift attracting inheritance tax.

There is a seven-year rule when it comes to making gifts. If you survive for seven years after making a gift, inheritance tax is not payable. This means you can give away more expensive assets to friends and family without them having to pay inheritance tax.

If all of the estate passes to a spouse or civil partner then there is no inheritance tax to pay at all.

You can find more information about exemptions here.

If the estate is over the threshold then there is 40% tax on the excess, it is usually the job of the executor to pay the tax bill and they will have to give a valuation of the assets at the time of death. Inheritance tax must be paid within six months from the end of the month in which the death happened, if payment is made after this then interest will be applied. Sometimes arrangements can be made to pay in instalments.

You can find comprehensive inheritance tax information and forms here.

If you have received an asset as part of a will, for example a property, and you decide to dispose of the asset, you will have to consider Capital Gains Tax (CGT). It is quite common for people to inherit a parent’s house and then want to sell it. Capital Gains Tax is not paid at the time of death but must be paid by you when you dispose of the asset if the property has appreciated in value between the time of inheritance and the point of sale.

You do not pay Capital Gains on all assets; it usually applies to property and personal assets of higher value such as expensive jewellery and paintings. Here is a guide to which assets CGT applies to.

Once you have disposed of any assets then you should report any gain or loss to your local Tax Office. You can either do this through your end of tax year return or by letting the Tax Office known in writing by 5th October following the tax year in which the gain happened. The tax office will let you know in due course how much tax you have to pay which will vary depending on the amount you have gained. If you don’t tell the tax office or leave it too late then you can face interest and surcharges.

You may find it useful to seek professional financial advice.