What will happen to tax debts if you die? We’ve compiled answers to this question and related common questions on debts when you pass, right here.
Debts after death usually follow the same rule, but there is a different rule for council debts that you need to know about – even if your name was not on the council tax bill.
Read on for the complete details and advice, or head to the end of our guide to get answers to common tax debts after death questions!
What happens to debt when you die?
If you have personal debt when you die, the debt is passed on to the deceased’s estate. This means any money that the deceased has left behind will be first used to pay off the debt, and then the remaining money/assets will be split as per the deceased’s wishes in their will or as stated in common law (and possibly subject to inheritance tax).
Paying back personal debts of the deceased is the responsibility of the will executor or administrator during probate. The executor of the will is never liable for paying the debts back to creditors just because they are family or a friend.
In a nutshell, most debts live on after the person dies, but they only live on for a short while to be paid back from the deceased’s estate. In most cases, friends and family will not be responsible for paying debts owned solely by the deceased.
Checking for Life Insurance
It is recommended that the executor(s) of the will to search to find out if the deceased had life insurance. Some life insurance policies will clear debts in the event of death rather than using the estate to pay the debt off, so it is always checking for a life insurance policy early.
You may want to get advice and professional support to avoid mistakes.
What about joint debts after death?
Jointly owned debts between the person who has died and a surviving individual, such as a joint loan or credit cards from a credit provider or a joint mortgage, will be the responsibility of the surviving beneficiary. For example, if you hold a joint personal loan, the loan will be the responsibility of the surviving individual after their death. You become personally liable.
But the deceased’s estate may still help you pay some of the debt off.
What will happen to HMRC debt if you die?
HM Revenue and Customs collects income tax and national insurance from workers in the UK. In some situations, people can get into debt with HMRC, especially those not on the PAYE scheme, i.e. people who are self-employed or run a limited company (not exclusively).
Outstanding tax debts to HMRC are also paid back within the deceased’s estate. For example, if the deceased owes £2,000 in tax to HMRC when they died and leave £10,000 in savings behind, £2,000 will be paid to HMRC and the remaining £8,000 will be paid as per the wishes of the deceased in their will.
Because the value of an estate is reported to HMRC for inheritance tax purposes, dealing with the deceased’s income tax debt during probate is not as difficult as you may imagine.
Contact HMRC for tax liability after death support
ALT TEXT: income assets HMRC advice
HMRC run specialised helplines to help executors of wills to make sure tax debts are paid back correctly. If you need to contact HMRC, we have listed the key numbers here:
You can call the HMRC Bereavement line on 0300 200 3300. This number should be used to discuss individual debts relating to income tax.
You might need to call the HMRC deceased estate helpline on 0300 123 1072 to discuss any matters relating to income tax or Capital Gains Tax (CGT).
Other legal services and free debt charities are available to help.
What If there’s not enough money left behind?
If the amount of debt owed is more valuable than the amount of money and assets left behind by the deceased, their estate becomes known as an insolvent estate.
For example, if someone owed debts to government departments like HMRC and multiple creditors, and the total value of these debts is greater than the wealth left behind, they have an insolvent estate.
Insolvent estates are tricky and dealing with them is best done with professional help. HMRC and creditors will be repaid from what is available in a priority order.
Tax debt is one of the first to be paid back. Getting the priority order wrong can have consequences and make the PR (equivalent to executor) owe the money instead.
What happens to council tax debt if someone dies?
Council debts are a little different in England and Wales. If someone dies with a council debt and they lived alone, the debt will be paid back through their estate. However, if the deceased was living with someone in the property during the time the debt accumulated, that person will also be responsible for paying back the debt because they benefited from a share of the property.
The other person – possibly a de facto partner, surviving spouse or civil partner – will have to personally pay back this debt even if their name was not on the council tax account during the relevant period. As they lived in the property during the time, the debt must be paid by them too.
The deceased person’s share of this debt could be paid back from their estate, but if the required funds to pay it off are not left behind, the debt passes to the other property occupier.
The same person will be left to pay the future council tax bills if they are now the sole occupier of the property, but they can claim a reduction of 25%.
The same rules apply to water bills. They have to pay the water bill even if they were not on the water bill, as long as they lived in the property where the water was supplied.
Request tax debts to be written off
Executors of a will in England, Wales, Scotland and Northern Ireland can ask for council debts to be written off if the deceased was in arrears. Local authorities have the power to decide and wipe these debts, but there is no guarantee that they will do so.
If you are now liable for this type of debt even though you were not named on the account (as explained above) you might want to ask for the debt to be wiped. Or at the very least, ask for an affordable repayment structure.
You could argue that the person who dies did not leave behind enough money or valuable assets to help you repay a larger bill and you need time. Most local authorities will be sympathetic and negotiate a repayment plan if needed.
Tax debts after death FAQs
What will happen to debt when you die?
For the most part, personal debt dies with the debtor, but the debts may need to be paid back through the deceased’s estate. If the value of the estate does not cover the debts owed, then the estate is known as an insolvent estate.
In the case of council debts, these could be passed on to joint tenants, tenants in common or when the property is owned and lived in by a surviving individual. This is the case even if that person was not named on the council account.
Is family responsible for deceased debt?
A family is not directly liable for debts left behind by someone. However, if a family member is named as an executor of the will, he/she will need to ensure all debts are paid back from the estate before distributing the estate to beneficiaries of the will. If they fail to do their due diligence, they could owe the debt themselves.
Is tax debt forgiven when you are dead?
Tax debt is not forgiven when you die. HMRC will request that any income tax or national insurance owed is paid from the person’s estate when applicable. If the deceased does not have enough money left to pay the debt, no family member will be asked to pay. It is more likely for most people that HMRC will owe a tax repayment to the person who has died, which will be added to their estate.
Is there a service to help with a deceased’s tax debt?
There is an advice service offered by HMRC to help with probate and specifically tax repayments after death. You might want to get further advice via a probate legal service or a debt charity. Find and contact a debt charity from here!