Dealing with investments after the death of an investor (2024)

Who can deal with the deceased's assets?

When an individual dies their assets generally pass under the terms of their will or under the laws of intestacy (if they don't have a valid will). A well-constructed will names the executors. These are the people (or persons) chosen by the deceased to carry out their wishes and deal with their estate.

If there's no will in place or the named executors are unwilling or unable to act, others will need to be appointed. This is normally the surviving spouse/civil partner. When applying for authority to administer the estate, different rules apply in England & Wales, Scotland and Northern Ireland. In England, Wales and Northern Ireland this is known as applying for the Letters of Administration and in Scotland, Grant of Confirmation. In the absence of a valid will there's a hierarchy that determines who can apply to be appointed as executor, based upon their relationship to the deceased.

Jointly owned assets

Jointly owned investments and savings will automatically transfer to the surviving owner on first death. In Scotland this is also the case for jointly owned assets, provided there's a survivorship destination clause.

The asset doesn't pass to the personal representatives and doesn't pass according to the will or intestacy.

However, the value of the deceased's share of the asset will be included in their estate for IHT. No IHT will be payable if the joint owners are married or in a civil partnership as the transfer will be covered by the spousal exemption.

For valuation purposes it's normally assumed that each joint owner has an equal share. But for joint cash accounts, HMRC may look at the contributions each has made to the account and apportion the value accordingly.

Some land or property may be held jointly as tenants in common - in this situation there's no automatic transfer to the surviving owner and the deceased share is subject to the provisions in their will/intestacy rules.

Applying for Probate (Confirmation in Scotland)

In order to be able to deal with the deceased's assets, the executors will generally need to apply for Probate/Confirmation. This gives the executors the legal authority to collect in the deceased's assets and distribute them to the beneficiaries. In Scotland this is subject to the payment of the 'legal rights' due to the deceased's spouse/civil partner and children.

There may be some low value estates where probate is not required. The Probate process is different across the UK and details on rules for each country can be found at:

• Applying for Probate - GOV.UK (England & Wales)
• Scottish Courts & Tribunals (Scotland)
• Applying for Probate - nidirect (Northern Ireland)

Inheritance Tax

Before Probate can be granted, any IHT must be paid. The executors must submit the relevant IHT forms together with the Probate Application.

Excepted estates

Some estates where no IHT is due maynot need to submit a full IHT return to HMRC. These excepted estates are ones where the deceased was domiciled in the UK at the date of death, and generally includes estates with a value less than or equal to:

• the current nil rate band of £325,000
• £650,000 if the deceased is able to claim a full unused nil rate band from a deceased spouse/civil partner
• £3 million(£1million for deaths before1 January 2022) where there is no inheritance tax to pay because of spouse, civil partner or charity exemption

Suchestates may onlyhave tocomplete a much shorter IHT return using an IHT205 form and send this together with the Probate Application to the Probate Registry.

Estates where no IHT is due as a result of other exemptions, such as business property relief or normal expenditure of income exemption, will still be required to complete the full IHT return.

Full IHT return

If the estate is not an 'excepted estate', a full IHT return will need to be completed. The IHT return is made up of forms IHT400 plus any other relevant supplementary forms from the IHT400 series. These forms, along with IHT421 (Probate Summary) or in Scotland form C1 (Confirmation), should be submitted to HMRC.

Paying the IHT bill

Any inheritance tax must be paid by the end of the sixth month after death.

For example, if the person died in December, Inheritance Tax must be paid by 30th June. Interest will be payable if IHT is not paid by the due date.

Assets generally can't be sold until probate has been granted, so the executors may need to consider the following options to pay the IHT:

• The direct payment scheme - This scheme allows banks or other financial institutions to make payments directly to HMRC with money held in the deceased a cash accounts or government stocks
• Pay the IHT from own resources - If the executors to have sufficient cash reserves, they could pay the IHT themselves. Money can be claimed back from the estate once probate has been granted
• Life policy in trust - If the deceased took out a life policy written in trust to cover the IHT liability, the trust fund could be used to pay the IHT bill, if the beneficiaries are in agreement.
• Borrowing - The executors can also borrow funds to pay the IHT bill. The loan plus any interest will be repaid once probate has been granted.
• Paying in instalments - IHT can be paid in yearly instalments spread over 10 years if the asset may take time to sell, such as houses, shares in a business controlled by the deceased or unquoted shares. Interest is payable if this option is used and when the asset is sold, the IHT bill must be paid in full.

Probate will not be granted until all IHT has been paid in full. However, where it has been agreed that IHT can be made in instalments, probate can be granted once the first instalment has been paid.

IHT loss relief

IHT loss relief may be available where shares are sold during the administration period and their market value has fallen since the date of death. It applies to the sale of listed shares, including unit trusts and OEICs, within 12 months of death. There is no relief available for disposals of unquoted or AIM listed shares.

Inheritance tax is recalculated by substituting the sale proceeds for the value at the date of death. The relief is claimed by completing an IHT 35 form by those responsible for paying the IHT bill:

• the legal personal representatives, or
• the trustees of a qualifying interest in possession trust (in which the deceased held the IIP)

There is generally no relief if shares are transferred into the beneficiary's name rather than sold. This is the case where shares transferred form part of the residue of the estate, i.e. broadly the remainder of the estate after tax and any specific legacies are paid.

Administering the estate

Once Probate/Confirmation has been granted, the executors will receive a document to prove that they are the legal personal representatives (LPRs) and are able to administer the deceased's estate. This document will be:

These documents will generally be required by banks and other financial institutions in order to pay death claims, make encashments or change ownership, although each institution may have their own different rules and procedures for dealing with assets of a deceased investor.

Tax payable by Legal Personal Representatives

The LPRs are responsible for paying any tax the deceased owed for the period prior to their death. They're also responsible for any income and gains which arise during the administration period, i.e. the period after death but before the assets are distributed to the beneficiaries.

Period before death

Income which is treated as arising before death will be taxed at the deceased's marginal rates of tax and will be included on their final self-assessment return. This may include income which is deemed to have accrued in the period prior to death even though payment was not received until after they have died and investment bond gains where the deceased was the only or last surviving life assured.

CGT is not payable on capital gains when someone dies. The LPRs/beneficiaries will be deemed to have acquired the assets at the market value at the date of death.

Administration period

The LPRs will be responsible for completing a Trusts and Estates self-assessment SA900 and paying tax on income or gains that arise after death and before assets are distributed to the beneficiaries.

The LPRs pay tax at the following rates:

Income received during the administration period

Income received by the LPRs during the administration period is all taxable at basic rate. The income is not assessed upon them personally but collectively in their capacity as administrators of the estate. They don't receive a personal allowance, or other allowances such as the personal savings allowance, savings rate band or the dividend allowance.

When income is distributed to the estate beneficiaries it must be paid with an accompanying tax certificate (R185) which confirms the gross amount of income and the income tax already paid. The gross income will be added to the beneficiary's other income and from 6 April 2023 will retain its source nature i.e. savings, dividend etc meaning the beneficiary is able to utilise their starting rate for savings, personal savings and dividend allowances against this income. Any tax credit, for the tax paid by the LPRs can be used against the beneficiary's overall tax liability. Where the tax credit exceeds their tax liability a tax refund can usually be claimed.

From 6 April 2024 if estate income for the tax year is less than £500 then there will be no liability for the LPRs or the beneficiaries on the income recieved.

Capital gains/losses during the administration period

The LPRs will pay CGT at the basic rate of 20% (or 28% on residential property) on any gains made from the date of death until the disposal. They are entitled to a full annual CGT exemption for the tax year of death and up to two further tax years.

Tax reporting during the administration period

An SA900 Trust and Estate tax return will be required if;

• The estate was valued at more than £2.5M at the date of death,
• Combined income tax and capital gains tax of more than £10,000 was due during the administration period, or
• Assets with a value greater than £500,000 were sold in any tax year during the administration period.

Where an SA900 is required the LPRs must register the estate for tax using Trust Registration Service (TRS).

Dealing with investments

After Probate/Confirmation has been granted the LPRs can start gathering in the deceased assets, repaying any debts and distributing assets to beneficiaries (subject to the payment of claims for the "legal rights" due to the deceased's spouse/civil partner and children in Scotland).

The terms of the will determine if the LPRs have a choice in how they distribute assets. Where the will states that a specific asset is to be transferred to a beneficiary, the LPRs will normally transfer ownership of that asset into the name of the beneficiary. If the asset hasn't been specifically mentioned or if the asset falls into the residue of the estate, the LPRs will normally have a choice in how the value of assets are distributed to a beneficiary.

In these circ*mstances the LPRs will need to consider the type of asset involved, its tax treatment and practical issues before deciding how distribute.

Cash

Once Probate/Confirmation has been granted, the value of any cash accounts will typically be transferred into the LPRs bank account. After the debts of the estate have been satisfied, the funds can be transferred to the beneficiaries of the estate.

Shares, unit trusts and OEICs

Selling the holding

If the LPRs sell the holding, this is treated as a disposal for CGT purposes. The LPRs can make use of their annual CGT allowance and any gain in excess of the allowance will be taxed at 20%. When calculating the gain, the acquisition cost is the value at the date of death.

If IHT loss relief has been claimed, there will be no CGT gain or loss. This is because the executors must use the disposal value as the acquisition cost. (This is to prevent the executors also claiming a CGT loss when IHT loss relief has been claimed)

This IHT relief can be claimed where the shares are sold within 12 months of death and the value of the shares etc. has fallen.

Transferring ownership to the beneficiary

If the LPRs transfer ownership of the holding to the beneficiaries, this won't be a disposal for CGT purposes. The beneficiaries can then decide the timing of any capital gains and each beneficiary will have their own annual CGT exemption. The acquisition cost for future disposals will be the value at the date of death.

Jointly owned shares, unit trusts and OEICs

The deceased's share of jointly owned shares and collective investments will automatically transfer to the survivor without crystallising a gain. The surviving owner's acquisition cost of the holding for CGT will need to be adjusted to take into account their inherited share. In these circ*mstances, half the acquisition cost will be 50% of the original investment and half will be 50% of the value at the date of death.

Investment bonds

Death of the last life assured

If the deceased was the only or the last surviving life assured, a chargeable event will occur on their death and the bond will come to an end. Any gain will be assessed on the bond owner and the LPRs should include it in the deceased's self-assessment return for the tax year of death.

A chargeable event certificate will be issued using the bond value immediately before death to determine the chargeable gain. The gain is taxed in the same way as any other chargeable gain and can benefit from top slicing relief.

However, what is paid out by the bond provider may be different to the value used for chargeable event purposes. For some bonds the amount paid to the estate may be based on the bond value at the time the provider is notified of the death rather than date of death i.e. the bond remains invested until notification is received.

In this case, there is no tax due on the estate for any investment growth between the date of death and the date the bond provider receives notification the life assured has died. Equally the LPRs cannot offset any losses as a result if the value falls during this period.

A bond provider may add interest for the period between the bond ending and the date the death claim is actually paid. This will be treated as income of the estate and will be subject tax at 20%.

In addition the bond may contain a small amount life cover typically between 0.1% and 1% of the fund value. Any increase in the payment in respect of the life cover is not taxable.

Continuing lives assured and capital redemption policies

Capital redemption bonds and life assurance bonds with additional lives assured do not come to an end when the policyholder dies and will remain in force. The LPRs will have a choice on how they distribute the value of the bond to the beneficiaries of the estate. They can either:

• surrender the bond and pay the proceeds to the beneficiary or
• assign the bond to the beneficiary

Surrender the bond

This will be a chargeable event and any gain will be treated as estate income and subject to basic rate tax.

• Onshore bonds - the 20% non-reclaimable tax credit will satisfy the LPRs tax liability.
• Offshore bonds - the LPRs will have to pay 20% tax on the full gain.

When the LPRs distribute the bond proceeds to a beneficiary, they will provide a tax certificate R185 to each beneficiary receiving a share. This certificate confirms the gross amount of taxable income (share of bond gain) being distributed to each beneficiary and the 20% credit which reflects the tax already paid/deemed paid.

As this is treated as estate income rather than a bond gain, top slicing relief won't be available. The beneficiary may have further tax to pay if they are a higher or additional rate taxpayer. Non taxpaying beneficiaries are unable to reclaim the tax credit if it originated from an onshore bond as this tax credit remains non-reclaimable.

Assigning the bond to the beneficiary(s)
Ownership can be transferred to the beneficiary without triggering a chargeable event by assigning the bond. The beneficiary can then choose how and when the bond is surrendered.

Any gains will be calculated as if the beneficiary has owned the bond since inception and top slicing relief will be available. This makes assignment generally more favourable than the LPRs surrendering and distributing the proceeds.

Jointly owned bonds
Ownership will automatically transfer to the surviving owner on the first death. The whole amount of any future gains will be assessed upon the surviving owner. Tax on the gains will be calculated as if the survivor had owned the bond since inception and top slicing relief will be available.

ISAs

The tax advantages of an ISA can temporarily continue after death when an investor died after 6 April 2018. No new monies can be paid into the ISA after death but growth and income will remain tax free whilst the administration of the estate is being completed.

The tax advantages can continue until the sooner of:

• the administration of the estate is complete or
• the ISA is closed or
• three years has elapsed since the date of death

If the deceased ISA holder had a surviving spouse or civil partner, they may be entitled to an increased ISA allowance known as an additional permitted subscription (APS). This allows them to make an increased contribution to their own ISA based on the value of the deceased's plan.

It's not the deceased's ISA assets which are inherited but an additional ISA allowance equal to the value of the deceased's ISA. This additional allowance is separate to, and independent of, the £20,000 annual ISA allowance.

Types of legacy

It's important that the LPRs understand their obligations in relations to different types of legacy which may be included in the will and how these can be distributed tax efficiently.

Pecuniary legacy

When a specified sum of money has been left to an individual, this is known as a 'pecuniary legacy'. The beneficiary is entitled to the specified amount only. They will normally have no tax liability on receipt of this type of legacy.

Specific legacy

If a specific asset, such as property, land, investments or personal items has been left to an individual this is known as a 'specific legacy'. The beneficiary is entitled to that asset and any income produced by the asset between the date of death and the time it's passed to them.

Residuary legacy

Individuals can also receive a share of the estate residue. This is what's left after all taxes, expenses and liabilities have been paid and any specific and pecuniary legacies have been settled. A person who inherits a share of the residuary will also be entitled to any income generated from their share during the administration period.