Inheritance tax on UK inheritance

[Auntie Helen]

With regard to accounts freezing, when Mum died we weren't able to get an appointment to register her death until 5 days later. As I had access to her phone I transferred some money from her account to the Executor Account we had immediately set up - this seemed like a good idea. I read later this is actually illegal! No one seems to have asked us about it, and the bank gave the balance on the day of her death as the official balance, rather than the balance at the moment the bank account was frozen (which was about an hour after I notified them of her death by email with a scan of the death certificate).

Interestingly, three of the accounts have already paid out to our Executor Account - this is before probate is granted. Several of the others say they need to wait until probate is granted, however.

Anyway, Mum left everything really well organised so I was able to produce the list of accounts and their approximate value within a day. As I did Probate for my Dad this is just a little more complex (with the IHT) but the UK forms are manageable. The instructions that are given also seem reasonably understandable, written in plain English.

What I have learned from this is that when I die there will be a big IHT bill and, as I have no children, my nieces who will inherit my property will end up having to pay IHT in advance before they can sell the properties - and that could be very difficult. It makes me plan to offload at least one property more than seven years before I die so that at least that one isn't part of the Estate. I just have to know when I have eight years left to live...

[Escafusa]

With regard to accounts freezing, when Mum died we weren't able to get an appointment to register her death until 5 days later. As I had access to her phone I transferred some money from her account to the Executor Account we had immediately set up - this seemed like a good idea. I read later this is actually illegal! No one seems to have asked us about it, and the bank gave the balance on the day of her death as the official balance, rather than the balance at the moment the bank account was frozen (which was about an hour after I notified them of her death by email with a scan of the death certificate).

Interestingly, three of the accounts have already paid out to our Executor Account - this is before probate is granted. Several of the others say they need to wait until probate is granted, however.

Sounds typical. Some UK banks want probate, others don't require it. The same thing for the payment of legacies, one half of our financial legacies was paid out to each of us before probate was granted (though we had an estimate as to when it was due to come through, which proved to be fairly accurate). The second half was paid out just the other week, so after probate was granted.

I wouldn't worry too much about the 'illegal' transfer - it's not as if you were helping yourself at a cash-point, it went straight to the apposite executor account, so no real harm done.

[GaryC]

Brilliant - I call that a successful outcome, lol!

Oh the joys of IHT but it really is doable without spending a fortune on lawyer...

[GaryC]

don't tell the bank about the death until you are ready as they will immediately close accounts and linked credit cards

Accounts are usually frozen when the bank is notified that the holder has died, not closed. The account can only be closed later when all of the money has been paid out.
When my grandfather died in late 2022 the bank froze his current account when my aunt notified the bank. That account has yet to be closed.
We had the same experience with my late grandmother's account, although since probate wasn't needed in her case it didn't take as long.

OK, so frozen/closed? The point the bank made is that as long as they are not informed of the death they will not take such action and to make sure you don't tell them until you are ready, otherwise things like direct debits would also cease.

[Escafusa]

OK, so frozen/closed? The point the bank made is that as long as they are not informed of the death they will not take such action and to make sure you don't tell them until you are ready, otherwise things like direct debits would also cease.

That is exactly what happened to my aunt. She informed the bank in person that her father had died and they immediately froze the account and everything stopped going in and out. There can be advantages and disadvantages to that.

Though it was just for clarity, frozen and closed are for the bank two totally different things. An account can potentially remain frozen for years before you can have the money and the actual account closure.

[Auntie Helen]

I don’t know if it was frozen or closed. They said money could still be paid in but nothing would go out and Online banking with the app stopped. My sister has now transferred all the utility payments to the executor account whilst we sell the house.

Interestingly, my sister set up the account with NatWest, but they wouldn’t allow me on it as I don’t live in the UK. Clearly I’m the first time it has ever happened, that of two executors of a will, one might not live in the UK. Such a rare occurrence. When dad died we also had an executor account with NatWest and I was on that one so not sure what happened in the meantime but we are working round it okay. However, I will never bank with NatWest as they have been impossible to contact about this, I’m still very happy with First Direct and wish we had gone with them.

[GaryC]

What happened in the meantime is Brexit and the fact that UK banks, in general, are not allowing non-residents to retain, or open new accounts.

[Escafusa]

UK banks, in general, are not allowing non-residents to retain, or open new accounts.

Best not to tell them you're not (or no longer) a UK resident and/or simply domicile the account at a relative's UK address, then there shouldn't be any issues.

[Fraufruit]

UK banks, in general, are not allowing non-residents to retain, or open new accounts.

Best not to tell them you're not (or no longer) a UK resident and/or simply domicile the account at a relative's UK address, then there shouldn't be any issues.

Too bad all the information on the old TT on this very same subject is no longer available. From what I recall, "Best not to tell them" doesn't fly.

Perhaps someone will correct my memory.

[Escafusa]

"Best not to tell them" doesn't fly.

Works for us. I'm pretty sure that UK banks are not actively looking at their hundreds of thousands of account holders and suspecting them of not being resident in the UK just because there is very little activity in the account. They'll probably think that the holder simply does their main banking elsewhere. As long as you keep quiet about it, keep a bit of money in it and try perhaps to use the account now and again, there's absolutely no reason for it not to keep running as normal and without any non-resident charges too.

[Auntie Helen]

UK banks, in general, are not allowing non-residents to retain, or open new accounts.

Best not to tell them you're not (or no longer) a UK resident and/or simply domicile the account at a relative's UK address, then there shouldn't be any issues.

Too bad all the information on the old TT on this very same subject is no longer available. From what I recall, "Best not to tell them" doesn't fly.

Perhaps someone will correct my memory.

Didn’t work for me as I had to provide a utility bill or something to show I lived at my UK address (Mum’s address). I had a savings account and a credit card account that both sent statements there but NatWest refused to allow these (I never got to the bottom of why).

I tried to reopen a savings account that I closed last November (because of the German tax return changes on interest) but couldn’t get that restarted either without answering incorrectly which I am not willing to do.

[Escafusa]

Didn’t work for me as I had to provide a utility bill or something to show I lived at my UK address (Mum’s address). I had a savings account and a credit card account that both sent statements there but NatWest refused to allow these (I never got to the bottom of why).

I tried to reopen a savings account that I closed last November (because of the German tax return changes on interest) but couldn’t get that restarted either without answering incorrectly which I am not willing to do.

Forget Natwest, it seems they only cause you hassle. There are plenty of other banks and since you're selling, use your sister's address. You may have to tell a white lie if you want to open an account - I simply never closed mine, so didn't need to do this.
But thinking about it, banks break the rules (and the law) all the time, also for their customers' sake, so you opening an account at an address where you technically don't reside is hardly a hanging offence in comparison.

[PandaMunich]

The income arising to the Estate (bank interest, rental income etc) during the period of administration is taxed in the UK on the Executors without deductions or allowances. However, it is, ultimately, your income, though you received it from the Executors net of basic rate tax along with an R185 confirming the Executors have accounted for the tax to HMRC. For German tax purposes you are treated as receiving it in the year in which it was received by the Executors and would, I believe, be eligible for Tax Credit Relief under the UK/Germany DTA for the tax suffered in the UK. But Panda is our expert on that...

Yes, there is a clause in the double taxation agreement (DTA) between Germany and the UK, article 21 (2): https://www.bundesfinanzministerium.de/ ... onFile&v=3

• Article 21
  Other income
  
  (1) Items of income beneficially owned by a resident of a Contracting State, wherever arising, which are not dealt with in the
  foregoing Articles of this Convention shall be taxable only in that
  State.
  
  (2) Notwithstanding the provisions of paragraph 1, the following provisions shall apply with respect to income paid out of
  trusts or the estates of deceased persons in the course of
  administration:
  Where such income is paid to a beneficiary who is a resident of
  Germany by trustees or personal representatives who are
  residents of the United Kingdom out of income received by those
  trustees or personal representatives which would, if those
  trustees or personal representatives had been residents of
  Germany, have fallen within other Articles of this Convention, the
  beneficiary shall be treated as having received an amount of the
  income received by the trustees or personal representatives
  corresponding to the income received by him and any tax paid
  by the trustees or personal representatives on that amount shall
  be treated as having been paid by the beneficiary.

which means that any income, let's assume it's interest income, that the estate has, i.e. income that was earned between the date of death but before the assets had been distributed to the heirs, "counts" directly as the heir's income and any UK income tax paid by the estate counts as if the heir had paid that UK source tax directly himself.
--> the heir has to declare his share of the estate's interest income in his German tax return in Anlage KAP, line 19 "Ausländische Kapitalerträge": https://www.steuern.de/fileadmin/user_u ... ern.de.pdf

His share of the 20% UK income tax that the estate paid on the interest income: https://www.litrg.org.uk/tax-nic/trusts ... fter-death
can be used for a tax credit against 25% German income tax that is due on interest income, i.e. the heir (or rather the estate) ends up paying 20% income tax to the UK and 5% income tax to Germany on that UK interest income, under § 34c EStG: https://dejure.org/gesetze/EStG/34c.html
in conjunction with § 34d EStG: https://dejure.org/gesetze/EStG/34d.html
--> just fill his share of the UK income tax on the UK interest into line 41 "Anrechenbare noch nicht angerechnete ausländische Steuern" of Anlage KAP: https://www.steuern.de/fileadmin/user_u ... ern.de.pdf

When negotiating the DTA, they forgot to list article 21 (2) in the tax credit clause article 23 (1) DTA, which would have been the "usual" way of dealing with a tax credit laid down by a DTA, so you have to fall back upon the national tax credit rule § 34c EStG to get the tax credit.

[Escafusa]

You cannot sell the house before you get probate but you have to pay IHT before probate. Which means you have to estimate the house value for probate (thus we had three valuations). We plan to pay the IHT as soon as we get the magic reference number (takes about 3 weeks, I applied for it a week ago) as I have already estimated the IHT. Obviously the final amount might change if the house sells for less or more, in which case we have to pay more or get a refund.

Can you use money in the estate account to pay the inheritance tax, or is that also blocked until probate and you have to come up with it yourselves in the meantime?

[GaryC]

Probate is a cost of the Executors, so a cost to the Estate. They are entitled to use cash from the Estate to ay IHT and where a lot of tax is due the rules say they need to start paying it. I have not looked closely at the rules but they are, no doubt, set out in detail on the HMRC pages of GOV UK.

[Auntie Helen]

Yes, we have to pay inheritance tax before probate so before most of the estate is distributed and the house can be sold but several banks have already paid out so we have more than enough in the executor account to pay the inheritance tax.

If not we would have had to use our own money or even get a loan!

[alma.freya]

Yes, we have to pay inheritance tax before probate so before most of the estate is distributed and the house can be sold but several banks have already paid out so we have more than enough in the executor account to pay the inheritance tax.

If not we would have had to use our own money or even get a loan!

Unrelated, but the link to your blog doesn't work because you have omitted the protocol (https://). This should work: https://www.auntiehelen.co.uk

[Escafusa]

If not we would have had to use our own money or even get a loan!

Or since many non-UK residents like us wouldn't qualify for a UK loan, presumably one could defer payment, wait for probate, sell properties (if applicable) and then simply pay the inheritance tax plus the interest that HMRC charge.
I find it ludicrous and unfair that inheritance tax is charged before probate is granted and equally ridiculous that non-UK tax residents are charged it at all.

[Auntie Helen]

You can’t defer payment, they insist on it before probate otherwise it becomes really hard for them to get the IHT money if it is distributed among lots of people who don’t want to give money away. Or so I gather.

It is clear from the government website that probate is not granted until IHT is paid, at least partly. I think the “partly” here gives room for manoeuvre.

[alma.freya]

equally ridiculous that non-UK tax residents are charged it at all.

The tax is owed by the estate, not by the beneficiaries. It therefore doesn't matter where a beneficiary lives, because they are not the ones paying the tax.