When it comes to inheritance, most people will only ever have to worry about Capital Acquisitions Tax, more commonly known as inheritance tax, which we looked at last week. There is, however, one other major charge on the estate of any deceased - Probate Tax. Since 1993, Probate Tax has been payable on the full value of the estate of the deceased at the rate of 2 per cent, provided that the estate is valued at more than a certain lower limit - currently £10,820.
This figure rises each year in line with inflation. There is some marginal relief on estates whose value is only slightly higher than the threshold. This tax is normally payable by the executor of the will or the administrator of the estate. However, in cases where this does not happen, the onus falls squarely on the beneficiaries.
Working it out
Any executor should first make a full list of all the assets of the deceased, including property, bank accounts, investments and insurance policies. If necessary, professional valuations should be obtained.
A list of any outstanding debts is also required. Without one the final liability of the estate for Probate Tax cannot be assessed and, if incomplete, there is always the chance of unwelcome surprises for the executor after the distributing of the net estate to the beneficiaries.
For that reason alone, it is advisable that, in cases where there is any doubt about the comprehensiveness of the creditors' list, executors protect themselves from subsequent legal claims by putting a notice in daily newspapers seeking information from anyone who claims to be a creditor by a certain fixed date.
Apart from the tax assessment requirements, the above details are necessary for the granting of probate on any estate - a vital preliminary to the executing of the provisions of a will and the disbursement of bequests to beneficiaries.
Exceptions
There are a number of important exceptions to the above rules on liability:
all assets passing between spouses are exempt, including the family home; [SBX]
if there is no surviving spouse, there is no tax liability on a dependant child or other relative who normally resides in the family home and whose earnings do not exceed certain limits, currently £4,472 a year; [SBX]
property which is transferred at any time before death is not liable to Probate Tax, although it will certainly continue to be subject to the provisions of Capital Acquisitions Tax; [SBX]
property in joint ownership transfers to the other owner without recourse to Probate Tax assessment; [SBX]
pensions or death-in-service benefit are not considered in assessing Probate Tax; [SBX]
property being given to charity or heritage properties fulfilling certain criteria are exempt; [SBX] finally, and significantly, the value of agricultural land is cut by 30 per cent for the purposes of Probate Tax assessment.
Unmarried Couples
Legislators have failed so far to address the need for reform to reflect the reality of a society where couples live together over long periods without getting married. There is no specific provision for the transfer of property between unmarried couples, free of Probate Tax. However, if the home is owned jointly, the surviving partner can avail of the exception on joint ownership.
Cutting the bill
Having ascertained the amount due under Probate Tax, the executor, or the beneficiaries if the executor has failed to pay the tax due, can cut the liability by paying early. For every month or part thereof under nine months following the death, a discount of 1.25 per cent is allowed on the charge. Conversely, the cost of delay can be high; for every month or part thereof over the nine-month limit a penalty of 1.25 per cent is applicable up to a maximum of double the original liability.
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