Dealing with someone’s estate after they pass can be tough. There’s legal stuff, paperwork, and taxes to handle until everything is sorted out. One thing that can be puzzling is how income tax works for those getting money or property from the estate.
The rules aren’t always simple, and many don’t know that the estate can actually earn taxable income even after the person is gone.
This guide tells beneficiaries what they should know about income tax while the estate is being managed. We’ll go over how the estate is taxed, when beneficiaries have to pay tax, how different kinds of income are treated, and what happens after the estate is fully settled. Hopefully, this will give you a better idea of where you stand and what to expect.
When someone dies, their estate includes everything they owned. This means their property, savings, investments, any business they had, and their personal stuff. After they pass away, no one can just grab these things. They’re all held in the estate until a personal representative shows up.
This person is either the executor named in the will or an administrator picked by the court if there’s no will. Their job is to collect assets, settle debts, and give what’s left to the people who should get it. The estate might also make money during this time, usually from rental properties, savings interest, or stock dividends. This income has to be taxed before the beneficiaries get anything.
The administration period is the time from when someone dies until the personal representative finishes everything.
Some estates settle quickly, but others take longer.
During this period, the estate is taxed by HMRC as a separate entity, not the people getting the inheritance. The personal representative handles the taxes. This can include registering the estate, filing tax returns, and paying any tax.
The estate pays income tax at these rates:
• 20% for interest and rental income
• 8.75% for dividend income
These are the standard estate rates, unless something else applies. People who get an inheritance don’t do anything at this point. If they get any money before the estate is fully settled, it’s after tax has been paid.
Once the administration period is completed, the personal representative will distribute the remaining assets and income to the beneficiaries. At this stage, beneficiaries might have to pay taxes on specific payments.
The key idea is that beneficiaries are treated as receiving income that has already been taxed by the estate. They may have to declare this income on their own tax returns. The same income won’t be taxed twice by HMRC, but if the beneficiaries’ personal tax rate is higher than the tax the estate has already paid, they might have to pay more.
This typically applies to income distributions like residue payments, dividends, and rental income. This rule excludes capital or non-income gifts from the estate.
When an estate generates income while it’s being managed, the executor will give you your share, and they’ll also give you credit for any taxes the estate already paid on that income. You may have to report this income on your own tax return.
If you receive £2,000 in income from an estate, and it’s already been taxed at 20%, the estate will give you paperwork showing the total income and the tax already paid. Just include the full amount on your tax return and claim a credit for the tax that’s already been paid. Depending on your personal tax bracket, you might owe a bit more, or you might be all set.
Once you have the assets, any income they generate is taxed as your regular income. Some examples include:
• Rental income from inherited property
• Dividends from shares are now in your name
• Interest from a savings account that’s now yours
The estate isn’t involved after the assets are transferred to you.
Sometimes a will sets up a trust instead of giving assets directly to someone. Trusts have their own tax rules. You might get payments from the trust instead of the estate. If so, the trustee will give you the necessary tax info. Often, trust income has a tax credit and must be reported on your tax return.
Understanding the tax implications of payments from a deceased estate is crucial. Some payments are tax-free for beneficiaries, including:
• Cash gifts from the estate
• Money from the sale of property or investments passed on to you
• Personal items like jewelry or household goods
• Lump sums from life insurance policies held in trust
These transfers are considered capital, not income, and aren’t reported on your income tax return.
We make sure everything is submitted correctly and on time.
As a personal representative, you’re required to maintain accurate records of the estate’s financial activities, including income, expenses, and distributions. When distributing income to beneficiaries, you should furnish each one with a formal statement. This statement should detail:
• The amount of income that was distributed.
• The form of income (like interest, dividends, or rental income).
• The amount of tax already paid by the estate.
Beneficiaries can use this statement when completing their self-assessment tax returns. HM Revenue & Customs (HMRC) requires this information to assess if there are more taxes to pay.
Estates can stay open for a while if there are property sales, legal problems, or disagreements. Taxes must be paid each year the estate makes money. People who inherit from the estate might get several payments, and each could have a different tax situation. These rules still count, even if you don’t get any money until the estate is settled completely.
When income is divided among multiple beneficiaries, tax statements are issued to each recipient individually. Your personal tax obligations are based solely on your portion of the income, without regard to the tax status or distribution of the rest of the estate.
When a person who died had property or investments in another country, figuring out the taxes can get tricky. The estate might need to work with tax people in that country, as well as the UK tax office (HMRC). Also, those getting money from the estate should know about agreements that prevent taxing the same income twice, in case they get money from abroad. Usually, the person in charge of the estate takes care of the foreign income while the estate is still being sorted out. After that, it’s up to the people who get the money.
Upon inheriting a business or partnership stake, any income earned after the transfer date is yours. This includes profits, trading income, and dividends if the business operates as a type of company. If you weren’t already filing a tax return, you might have to register for self-assessment.
When managing an estate, income tax isn’t the only tax to consider. The estate might sell assets before distributing funds to beneficiaries. Any gains from these sales are the estate’s responsibility, not the beneficiaries’.
After the assets are transferred, beneficiaries might face Capital Gains Tax (CGT) if they sell the inherited assets. For CGT purposes, the asset’s base cost is its market value on the date of death, not the original purchase price. This can lower the taxable gain, especially for assets held for a long time.
Although CGT is separate from income tax, beneficiaries should know about it, as they often sell inherited assets later on.
While the personal representative typically handles many tax duties, beneficiaries also have certain responsibilities. These include:
• Keeping estate-related documents.
• Reporting income distributions on your tax return.
• Ascertaining if the tax credit covers your total liability.
• Registering for self-assessment if you’re not already required to file.
• Seeking advice on whether you should inherit difficult assets like foreign property or business holdings.
Beneficiaries are not in charge of the estate tax. They must manage their own tax duties related to any income they receive from the estate.
Several issues appear regularly when beneficiaries deal with estate income. Here are the most common and how to avoid them.
It’s a common misunderstanding that estate tax payments mean beneficiaries don’t have to report anything. This isn’t always the case. If you get income that has a tax credit, you still need to declare it.
When estates are settled, cash gifts should be distinguished from income. Estate distributions sometimes include both, so a careful review of the estate statement is advisable.
When filing your taxes, remember to include all applicable credits along with your gross income. Failing to do so might cause the tax authority to assess a higher tax liability than what you actually owe. Therefore, it is important to verify that all relevant credits are reported.
When you inherit rental property or investments, it’s important to review your self-assessment responsibilities to ensure they are current.
As the estate winds down, the executor prepares a final report. This report includes:
• All the income the estate received
• All taxes paid
• All payouts to heirs
• The estate’s final balance
Once this report is done and all tax issues are resolved, the estate can close. Heirs will then get what’s left. After that, the estate won’t earn any money, and the heirs will be responsible for paying taxes on any income from what they inherit.
Some estates are simple, but others need a pro’s touch. Get advice if:
• You have income coming from many places.
• You inherit property that’s already being rented out.
• You inherit a business or shares in a company that isn’t public.
• You get income from abroad.
• You’re not sure how to do your self-assessment.
A little planning now can stop tax problems down the road and keep you on the right side of the taxman (HMRC).
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