Executors: what you need to know about tax

An executor has many duties, one of them is to ensure that the deceased’s tax affairs have been settled.

Inheritance Tax

Executors must value the assets and liabilities of the person who has died to obtain a gross and net value of the estate as that will determine whether or not there is any inheritance tax to pay.

As a starting point, assets which pass to a spouse, civil partner or charity do so free of tax. Some business and agricultural property also attracts inheritance tax relief. In addition to this each person has £325,000 which they can pass free of tax (the nil rate band) and if they leave property to children or direct descendants then have another £175,000 to pass free of inheritance tax (the residence nil rate band). If the value of the estate exceeds the tax free threshold, the balance over will be subject to tax at 40%.

These thresholds may be affected by gifts which you make in the last 7 years of your lifetime or trusts that you create during your lifetime. It is also important to note that if someone is domiciled outside of the UK then this will impact the allowances and reliefs available for their estate.

Capital Gains Tax

Capital Gains Tax is charged when executors dispose of an asset and the asset has increased in value between the date of the deceased’s death and the date of the sale. This can occur when executors sell a property but can also apply to investments, shares or chattels.

Generally speaking, there is an annual exemption which can be used to offset the gain on the asset. For executors, during the 2023/2024 tax year this is £6,000. This allowance will be lowered from the 2024/2025 tax year onwards and permanently fixed at £3,000. The allowance is only available in the tax year which the deceased died and the following 2 tax years. After this no allowances are available. Executors can deduct the cost of selling the asset such as estate agent commission, legal costs and administration fees for the sale of investments.

Once the exemptions and other expenses have been deducted, the executors will have the ‘net gain’. CGT is charged at a rate of 28% for residential property and 20% for all other assets. Gains on property must be reported and paid within 60 days of the sale completing.

Income Tax

Executors must finalise the tax affairs up to the date of the deceased’s death and also for the period that the estate is being administered.

The executors can use the Tell Us Once service to notify HMRC of the death. HMRC will then write to them to advise which tax years need to be finalised and let them know if there is any information outstanding. This will vary depending on whether the deceased was working, retired or receiving state benefits. If the deceased completed self-assessment tax returns, the executors will need to complete any outstanding returns.

Separately, executors must keep a record of all income that has been received into the estate. This includes bank account interest, dividends, rental income and trust income. Some forms of income such as ISA’s and Premium Bond prizes are exempt from tax. There are informal arrangements for reporting small amounts of income. However, if an estate has been valued at more than £2.5 million, the total tax is more than £10,000 or the executors have sold more than £500,000 worth of assets in one tax year then the executors will need to complete a tax return.

Each type of tax has different reporting requirements, allowances and reliefs. It is important that executors keep records of all transactions and it is often best practice to seek advice from a solicitor or tax advisor to ensure it is correctly reported to HMRC.

If you would like any advice or assistance, please contact a member of our Private Wealth & Succession team today on 0113 207 0000.