What to do when a family member dies: taxes, probate and inheritance explained

From valuing the estate to Inheritance Tax, Sarah Coles explains the 8 things you must handle when you lose a loved one

Introduction

When someone passes away, their family expects to have to deal with extreme emotions and personal and practical upheaval, as they come to terms with their loss.

However, what few of them realise is that simultaneously they may face the frustration, confusion and expense of handling the estate.

Here we look at the typical stages you’ll through and decisions you may have to make.

Do you need to go through probate?

You will usually need to get a ‘grant of representation’ – known as probate, and there’s a great deal of legwork involved.

You’ll need to start by working out who should be dealing with the estate and related financial issues.

If there’s a will, an executor will be named. If not, the next of kin can handle the process.

In a small number of cases, things are very straightforward.

Easy cases occur when the estate is very small (usually under £5,000), doesn’t include property, land or shares, or because everything was held equally in joint names and passes to the survivor.

Tell everyone who needs to know

The first job is to find the assets. This is much easier if there is an asset register listing everything from savings accounts to pensions.

Otherwise, it’s a case of looking through their paperwork to identify any company they had dealings with, owed money to, or held assets with.

This has become easier with the launch of the Death Notification Service, which will notify several financial institutions at the same time.

Barclays, HSBC, Lloyds, Nationwide, RBS and Santander are all members, as are their subsidiaries Barclaycard, First Direct, Halifax, M&S Bank, Scottish Widdows and NatWest.

Unfortunately, that's only the start of contacting companies: you'll still need to talk to utility companies, TV Licensing and the telephone provider, as well as mortgage and credit cards companies not included above, insurers, savings providers, investment firms and their employer.

They will usually need to see the death certificate and may need you to provide other documents, so it’s worth phoning to ask what you need to provide.

Once you have sent these in, they tend to freeze the account until probate is complete.

Check the position with the mortgage too. They may have had insurance to pay it off on their death; otherwise, if the mortgage needs to be paid while the estate goes through probate, you may need to pay it yourself and claim it from the estate.

Value the estate

When you contact these organisations, find out what is owed, or held on account, because you will need this to estimate the value of the estate.

Your estimate only needs to be accurate enough to establish whether the estate is larger than the inheritance tax threshold – of £325,000 plus a residence nil rate band (learn more here) of £125,000.

The estimate will include the value of all savings and investments on the day the person died, plus the value of the property, their valuables (what they would get if they were sold on the open market today) and any insurance payouts if they have been paid into the estate.

You also need to factor in any debts.

If they gave any gifts above their allowances within the past seven years, you will need to include those too.

If they held any assets jointly you will need to divide them in half (assuming they were owned by two people).

These will pass automatically if you held them as joint tenants, so they don’t go through probate.

However, they still need to be included in the Inheritance Tax calculations.

Read more about Inheritance Tax and how to reduce your bill here

Identify the beneficiaries

If there is a will, it will be clear who is expecting to receive the proceeds of the estate – and in what amounts.

However, even at this stage, it’s not too late to do some post-death planning, to reduce the tax due on the estate.

If, for example, they had established a pattern of giving regular gifts from income over the years and had not got around to it in the year of their death, you can make those gifts after they pass away.

You may also want to vary the beneficiaries for tax (or other) reasons, and providing the beneficiaries agree, you can do this through a deed of variation.

Calculating and paying tax

The next step is to determine whether there is any tax to pay – because you will need to settle up before you apply for probate.

If they usually fill out a tax return, for example, you will need to complete one for their year of death and pay any tax due.

If they realised a gain in the financial year in which they died, there may be taxes to pay on that too.

You also need to calculate and pay the Inheritance Tax.

Depending on the size of the estate, the way it has been left, and whether you plan to take advantage of the residence nil rate band, you will either have to fill out a short IHT form online or the long paper one – and send it to HMRC.

This requires a detailed valuation, including subtracting all the estate’s debts (including the mortgage) and getting proper valuations of anything worth more than £500 (you will need to keep the records of these valuations).

If there’s any Inheritance Tax due, you will need to pay at least some of it now. In rare cases, it may have taken longer than six months to reach this stage, in which case you will need to contact HMRC before six months elapses and arrange to pay some of the tax.

Some people will leave a life insurance policy to cover this cost.

This can be written using standard trust forms so that the payout falls out of the estate.

Alternatively, if you need to pay this tax out of your own pocket, you can reclaim it from the estate later.

Grant of Representation

Finally, you are ready to send your application to the probate registry.

You will need the probate form, the Inheritance Tax form, the death certificate, the will, and a fee, and you will receive a ‘grant of representation’, which gives you access to the assets.

Once you have this, you can send the grant to all the organisations holding assets and release the cash.

Paying anything else that’s owed

You should place a notice in The Gazette in order to encourage anyone to come forward to claim debts – which will protect you from the responsibility for them in future.

Then you’ll need to pay off any debts – including any solicitor’s bills.

Distributing assets

Once all this is done, you can distribute the estate according to the will.

If there is no will, they have died intestate, and you will have to distribute assets according to the rules of intestacy.

ISAs will need to be included as part of the estate when you are calculating the Inheritance Tax due because they lose their tax-efficient status on death.

However, after you have gone through the probate process, if the spouse inherits the assets of the ISA, they will get an Additional Permitted Subscription, which is an extra ISA allowance equal to the value of the investments in the ISA at the end of the probate process or the value on the date of death – whichever is higher.

They can then wrap the assets back up in an ISA wrapper.

In many cases, given enough time and patience, a family member will be able to work through this process on their own.

You can also seek professional advice, which will be paid for out of the estate.

Sarah Coles is a personal finance analyst at Hargreaves Lansdown. The views expressed in this article do not necessarily represent those of loveMONEY.