Calculating and paying income and capital gains tax after someone dies

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.

If the deceased lived in England, Scotland or Wales, you can use the Tell Us Once service to do this. HMRC and the Department for Work and Pensions (DWP) should then contact you about the deceased’s tax, benefits and entitlements automatically.

Completing a tax return for someone who has died

You might need to complete a self-assessment tax return 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, you should 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.

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 too 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 UK savings, investments or property rent

Interest and dividends from UK 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.

Income from foreign savings, investments or property rent

Income from rent on a property abroad, or foreign business profit and shareholdings won’t have UK tax automatically deducted.

You’ll need to complete a tax return for the estate on this income.

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.

New rules introduced in April 2020 mean that you need to report and pay any Capital Gains Tax due to HMRC within 30 days for any residential property sold belonging to the estate. The 30 days starts when the sale completes.

Find out more on the Government website.

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Whatever your circumstances or plans, move forward with MoneyHelper.

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