Will I Be Charged Tax on My Inheritance?

29 November 2018

If you are the Beneficiary of an Estate, it's not usually the case that you'll personally have to pay inheritance tax on the inheritance you receive. However, if the Estate is liable to pay any taxes then this will reduce the amount of money that's then left over to distribute to Beneficiaries.

If you are a residuary Beneficiary (meaning that you inherit a share of what's left in the Estate after debts have been settled) then you could find that the value of your inheritance is reduced as a result of tax bills of the Estate.

Who Is Responsible for Paying Taxes During Probate?

When someone dies, their affairs need to be wound up, debts paid off and everything they owned distributed to those entitled to inherit it. This process is commonly referred to as Probate. There can be a lot of complex legal, financial and administrative work involved in the Probate process, and all of this work has to be carried out in a certain way.

The person who is conducting this work is called the Executor (if there was a Will) or the Administrator (if there was not). The 'catch-all' term for this individual is 'Personal Representative.'

Amongst many other duties, the Personal Representative is responsible for calculating and paying any Inheritance Tax, Income Tax or Capital Gains Tax that is payable by the Estate.

Payments from the Estate – Order of Priority

During the administration of an Estate, payments will need to be made in a strict order of priority. All debts, including tax bills, need to be settled first before any payments are made to Beneficiaries. If the Estate is insolvent, meaning it doesn't have enough money to settle its own debts, then the Beneficiaries will not receive an inheritance.

There are a different types of debts that will need to be settled during the Probate process, including:

  • Secured debts – such as a mortgage on the property, which would be settled using the proceeds of the property sale. If the sale proceeds are not enough to meet the mortgage debt, the balance will be payable out of the rest of the estate.

And other debts which should be settled in the following order:

  1. The funeral bill
  2. Estate administration expenses (including Inheritance Tax, Income Tax, fee for the Grant of Probate, property valuation fees and estate agent fees, for example)
  3. Preferred debts – this less common category refers to things such as wages due to employees (if the deceased was a business owner)
  4. Unsecured debts – including credit card bills or bank loans, for example
  5. Deferred debts – these may be informal loans between family members

Once all of the debts have been settled in this order, then the remaining Estate can be distributed to the Beneficiaries. Payments to the Beneficiaries will also need to be made in a set order, depending on what they are receiving.

If the deceased left a Will, then there are different types of legacies (or gifts) that they could have included. Pecuniary (monetary) Legacies are gifts of sums of money and Residuary Legacies are gifts of certain proportions of the remaining Estate.

Pecuniary Legacies will need to be paid before Residuary Legacies, which are paid last. This means that if you are a residuary Beneficiary then the other expenses and debts of the Estate, such as taxes, bills and funeral costs, will have a direct impact on the amount of inheritance that you receive.

Can I See the Estate Accounts?

If you are a residuary Beneficiary and therefore impacted by payments that are made from the Estate, you might be wondering if you can have sight of these accounts. The answer to this is yes – as a residuary Beneficiary of the Estate, you are generally entitled to see the Estate Accounts. You can contact the Personal Representative to request a copy.

If someone has died and you need help with probate, contact us:

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