Possible Financial Problems
After a person’s death, all their assets, including their bank and building society accounts, are automatically frozen. As Next of Kin, you may encounter problems as a result of this. However, it is common practice that if an account contains only a relatively small amount of money (usually less than £5,000) that the Bank or Building Society releases this sum to the Next of Kin before the Grant (of Probate or Administration)has been made.
Furthermore, most Banks will allow payment to be made to a Funeral Director to cover the costs of the funeral before the Grant is available.
An important point to note is that if the deceased had a joint bank account then the other person named on the account will be automatically entitled to the money in the account by right of survivorship. They will be able to carry on using the account as ownership of the contents automatically passes to them on the other person’s death.
Inheritance Tax is the tax that is paid on the deceased’s estate. A person’s estate will consist of all assets that they owned at the time of death less all the liabilities, including mortgages and other loans. The current threshold for Inheritance Tax is £325,000 (tax year 2009/10). Inheritance tax is charged at a rate of 40% on the sum of the deceased’s estate above this threshold.
The expression ‘nil rate band’ is often used in the context of Inheritance Tax. This is the band up to £325,000 in which Inheritance Tax is not payable. The tax is paid by the Personal Representatives (this term covers both Executors and Administrators).
If Inheritance Tax is due on the deceased’s estate, the Personal Representatives will normally have to pay at least some of this tax bill before the Grant can be made. You should note that the issue of the Grant does not mean that the final Inheritance Tax liability has been agreed.
The Personal Representatives will usually be contacted by HM Revenue and Customs again after they have received the Grant. Subject to the requirement to pay some of the Inheritance Tax bill before receiving the Grant, in most cases, the balance of the Inheritance Tax bill must be paid within six months from the end of the month in which death occurs. Interest will be charged thereafter on any outstanding liability.
You should also be aware that tax on some assets including land and buildings (including the deceased’s house) can be deferred and paid in equal instalments over ten years, but interest will be charged in most cases.
Please note: No Inheritance Tax is paid on transfers to a surviving spouse. This rule was augmented by Inheritance Tax spouse relief introduced with immediate effect on 9th October 2007. This relaxed the usage of the nil rate band for Inheritance Tax between spouses (and to same sex couples who have registered their civil partnership). Previously, when a surviving spouse died only their own nil rate band of £325,000 was available. A couple now shares a joint nil-rate band of £650,000 so that any relief not used when the first spouse dies is available to the surviving spouse. For further information on Inheritance Tax spouse relief, please click here.
Donations to UK registered Charities are exempt.
Account must be taken of certain gifts made in the seven years before the person died. Not all gifts in this seven year period have to be included. All gifts between spouses are exempt as are a single gift of £3,000 each year, any number of smaller gifts of £250, £5,000 to a child getting married and finally gifts that can be called normal habitual expenditure (which means that they are made out of income not capital).
Furthermore, if the person who has died gave away an asset in their lifetime but reserved an interest in it, then the value of the asset will also be included in their estate. This is the case even if the gift was made more than seven years before death. This usually happens when a person gives their house to their children but continues to live there until their death. Here the value of the house will be included in the estate for the purposes of calculating the Inheritance Tax liability.
Paying the Inheritance Tax Liability
The Personal Representatives (the term covers both Executors and Administrators) are required to pay the Inheritance Tax liability before the application for Probate or Letters of Administration can be made. This can constitute a problem as the deceased’s assets are frozen from the date of death. The Inland Revenue will accept payment using the following methods:
- A cheque, electronic bank transfer or giro cheque (from a joint account held with the deceased)
- Payment by the Next of Kin or the Personal Representatives who will be reimbursed by the estate after obtaining Probate
- From the deceased’s bank or building society account using the Inheritance Tax direct payment scheme. (You will need to check that the deceased’s bank or building society is a member of this scheme)
- Payment using British Government stock held in the deceased’s name
- Payment using National Savings investments held in the deceased’s name
Personal Representatives and Inheritance Tax
The Personal Representatives are responsible for paying any Inheritance Tax due on the deceased’s estate. If the amount of Inheritance Tax is calculated incorrectly, the Personal Representatives could become personally liable for the balance at a later date. They should consider appointing a Solicitor or an Accountant if they are informed by the Probate Registry that Inheritance Tax is payable. The cost of this legal advice will be paid from the estate.
If you live in Northern Ireland, to find a Solicitor who specialises in Probate and Inheritance Tax in your area please click here. To find an Accountant, you should contact the Institute of Chartered Accountants in Ireland at email@example.com
For further information on the financial considerations after a person’s death, please go to www.direct.gov.uk
For further information on Inheritance Tax, please go to http://www.hmrc.gov.uk
Please note that information which we provide through Lasting Post is in outline for information or educational purposes only. The information is not a substitute for the professional judgement of a Solicitor, Accountant or other professional adviser. We cannot guarantee that information provided by Lasting Post will meet your individual needs, as this will very much depend on your individual circumstances. You should therefore use the information only as a starting point for your enquiries.