9th November 2023
general
There are also administrative and tax implications to consider. Finalising an estate can be complicated and may take several months.
So, what are the key points you need to know if you are due to receive an inheritance?
How Long Will the Process Take?
The process of valuing and finalising someone’s estate when they die is known as ‘probate,’ or ‘confirmation’ in Scotland. This includes paying final bills or debts, settling any tax due, and distributing the remaining estate to the selected beneficiaries.
This is taken care of by the executors of the estate (or the ‘administrators’ if the person died without a will).
This process can take some time, particularly if they have a complicated estate and multiple investments. Up to six months is not unusual, although if property needs to be sold, it may take a year or more.
On the other hand, not all estates require probate. If the deceased individual only owned cash and joint assets, it’s possible that the process can be bypassed entirely.
Do You Need to Pay Inheritance Tax?
The deceased person’s estate may be subject to Inheritance Tax (IHT) if it is valued at over £325,000 (or £650,000 on second death for a married couple).
If you are simply a beneficiary of the will, you do not need to be concerned with IHT. Any taxes on the estate need to be settled before you receive your share.
Of course, if you are also an executor, the responsibility of valuing the estate and paying the tax from the assets will fall to you. You may want to take legal and tax advice to make this process as simple as possible.
What About Other Taxes?
If the assets in the estate produce income, such as interest, dividends, or property rental, this income is likely to continue after death. The estate effectively works as a trust with its own tax responsibilities. The executors will need to make sure any outstanding tax on this income, incurred before and after death, is settled before the estate can be passed on to the beneficiaries.
As the beneficiary, when you inherit income-producing assets, the interest, dividends, or rental will form part of your own taxable income. You will need to pay tax on this at your personal rate until such time as you sell the asset.
Capital Gains Tax (CGT) may also apply on the estate. When a person dies, any gains built up on property and investments are rebased – this means that no CGT is due. The recipient will inherit the assets at the new base cost, i.e. the value as of the date of death. Beneficiaries only need to pay CGT if they later sell the assets and the value has increased.
If probate takes some time, the estate itself may need to pay some CGT if assets are sold before being distributed , having increased in value from the date of death.
If investment bonds form part of the estate, and they are not automatically encashed on death, the tax treatment is slightly different. Any gains built up are passed on along with ownership of the bond. This means that tax may be due on gains even if the bond is immediately encashed.
There are various exemptions and allowances that can be set against income and capital gains tax – it’s worth seeking advice if you are concerned about the tax implications.
The Impact on Your Own Estate
If you inherit a large sum of money, clearly this will increase the value of your own estate. For many people, this is not a major concern as they have plans for the money.
However, if your estate is already over the IHT nil rate band, you might be looking at options to reduce your tax liability.
If you know you are going to inherit assets, it may be a good idea to discuss this with your relative and suggest that they nominate someone else (for example, your children) or a trust. One of the main benefits of a trust is that you can be included as one of the potential beneficiaries without an impact on your own estate.
Of course, this may not be practical, and you might even receive an inheritance you were not expecting. In this case, you may want to consider a Deed of Variation. This allows you to change the terms of a will within two years of the date of death, providing all beneficiaries are in agreement.
Of course, you can gift the assets directly to your chosen beneficiary or trust, and this may be the only option if a Deed of Variation is not possible. However, this means that the asset will remain in your own estate for seven years, and may become chargeable to IHT (on top of any IHT already paid on the estate) if you die within that time.
What Should You Do With the Money?
Assuming the tax is settled and you have received your inheritance, you will need to consider options for the money.
For smaller amounts, a long-awaited holiday or home improvement may be the best use of the cash.
If you have inherited a large sum, or the estate includes property and investments, any decisions will require further consideration. You might want to spend some of the money, clear debts, and invest the remainder for the future. You will need to consider your own circumstances and tax position, as the current investments might not be ideally suited to your situation.
A financial adviser can help you make these important decisions and establish how the windfall can help you achieve your goals.
Please don’t hesitate to contact a member of the team to find out more about estate planning.
