Death duties – common misconceptions uncovered

February 10, 2015 10:54 am

Saddened elderly ladyThe impact of a bereavement in the family has the power to make everything else in life seem irrelevant. We can often be left feeling helpless and unprepared, meaning the legal issues that arise can seem a confusing and unwanted distraction from grieving.

When a family member dies, you may hear the expression ‘death duties’ used; but what does it actually mean? Below, some of the popular misconceptions on the subject are explained and we address some of the issues surrounding the term.

Death duties are the responsibility of an executor

The numerous definitions of the word ‘duties’ means that ‘death duties’ could quite easily be mistaken as a number of jobs or tasks that must be completed by the executor or administrator of a will. Most people are aware however that the term ‘death duties’ specifically relates to the duty or tax that may have to be paid out of the estate. One of the chief roles of an executor, aside from distributing the estate to beneficiaries, is to calculate the entire value of the estate and determine whether death duties are payable.

Death duties are deducted from the estate along with Inheritance Tax

No estate will have both death duties and Inheritance Tax deducted as they are in effect different names for the same tax. Death duties were introduced in the late nineteenth century and have since been replaced by Capital Transfer Tax and most recently Inheritance Tax. This is paid when the total value of a person’s estate edges over a certain threshold.

At 40% tax, nearly half of my inheritance will be taken away

With any tax, there can be confusion around the portion of the original sum that is taxed. Death Duties or the Inheritance Tax rate stands at 40% currently but it is only payable when an estate is valued at more than £325,000 and you will only need to pay 40% on the excess amount. For example an estate valued at £335,000 would only be taxed £4,000, while an estate valued at £324,999 would be exempt. There are also other exemptions which allow the transfer of a business, agricultural enterprise, woodland, and heritage assets (open to the public), to be passed on to beneficiaries without paying Inheritance Tax.

£650,000 of my father/mother’s estate should be free from Inheritance Tax

It is true that upon the death of their partner, the surviving partner can potentially double their tax free threshold to £650,000. However, this is reliant on the couple having been married or in a civil partnership. On the death of the first spouse, their tax-free threshold of £325,000 can be transferred to the surviving partner.

I’ve spent money that was gifted to me, so it can’t be taxed

Giving gifts to family and friends in later life is often seen as a savvy way of lowering the value of an estate in order to pay little or no Inheritance Tax. However, the rules around gifts are complex and should be carefully observed. Any beneficiary of a substantial financial gift will have to pay tax on the gift if the original benefactor dies within seven years if that estate inclusive of the original gift, is valued at more than £325,000. This is regardless of whether the gift has been spent or not.

How can I afford to pay death duties?

It is very rare that beneficiaries of a will are left out of pocket as a result of Inheritance Tax demands. It is the executor’s responsibility to pay Inheritance Tax, which is deducted from the overall value of the estate. If the executor makes a mistake in their original calculation and under-calculates Inheritance Tax, the executor would be liable for any shortfall if the estate has been distributed. In fact the executors of a will can also be left open to other liabilities and legal claims associated with the administration of the estate if they are not protected by executors insurance.

The total value of the estate has to be submitted to the tax office within 12 months of the estate owner dying but Inheritance Tax is payable six months after the person has died, unless you agree to pay in two instalments – the first after 6 months and the second after 12 months. Most banks will allow a named executor to access and pay Inheritance Tax out of the estate account but some won’t, unless Grant of Probate has been given. In these circumstances an executor may need to take out a loan to pay the Inheritance Tax.

If an executor fails to submit accounts on the due date or fails to pay Inheritance Tax in time they are personally liable to HMRC for any interest and or penalties. There is more flexibility with property assets – as executors or beneficiaries may not be in a position to sell a property and release capital funds for Inheritance Tax. HMRC will allow executors to make payments on account for property assets for up to 10 years.

Have you experienced any other confusing scenarios surrounding death duties or the distribution of an estate? Contact us and share your experiences.