What Happens to Tax Debt After Death? Who Deals With It?

Understanding what happens to tax debt after death can be tricky. But don’t worry, you’ve come to the right place. Every month, over 12,000 people visit this site to get advice on debt matters.

In this article, we will cover:

•  What happens to tax debt after someone dies
•  Who has the job of dealing with it
•  What types of taxes need to be sorted out when a person dies
•  The part an executor or administrator plays in this
•  How a person’s debts are settled after they die

If you’re worried about not being able to pay a debt or what will happen if a debt is left unpaid, we understand. Some of our team have had these same worries.

We’re here to help you find the answers you need. So, let’s dive in and learn more about tax debt after death.

Does a debt die with you?

It depends. Sometimes, a Council Tax debt could be written off by a local authority when a person dies. But it’s up to the council to decide whether to write the money owed or not.

In short, a local authority is not obliged to write off a Council Tax debt when a person dies.

In general, any money outstanding is included as liabilities in the deceased person’s estate.

Their estate includes the following:

• Money left in a bank or savings account
• Assets like vehicles, jewellery and property

An administrator or executor’s responsibility when dealing with a person’s last will and testament is to pay creditors any money they’re owed.

For example, secured debts and unsecured debts are paid in the following order:

• All secured debts such as a mortgage
• Priority debts such as income tax and council tax arrears
• Unsecured debts such as unsecured loans and credit card debts

In short, the debts remain the responsibility of the deceased person and nobody else. If the deceased person owes money to HMRC in taxes, Her Majesty’s Revenue and Customs is the first in line to get paid out of their estate.

What sort of taxes need to be dealt with when a person dies?

When a person dies, their tax affairs must be brought up to date. It’s worth noting that there could be more than one year of taxes that needs reconciling. 

This can happen when the deceased person suffered a long illness before passing away.

I’ve listed the sort of taxes that may need to be reconciled below:

• VAT if the deceased ran a business
• Payroll taxes for employees
• Corporation tax if the deceased had a company
• Council tax
• Personal taxes if the person was self-employed
• Inheritance tax

The value of a person’s estate must be reported for purposes of inheritance tax. As such, any tax debts can be easily calculated during probate.

How do a deceased person’s debts get settled? 

Debts are settled when a person dies by an executor or administrator. They use money in the deceased’s estate to pay all the creditors which include Her Majesty’s Revenue & Customs.

A list is made of all the creditors and payments to each are prioritised. For example, if money is owed to Her Majesty’s Revenue & Customs gets paid first.

Then secured debts are paid, followed by unsecured debts providing there are funds in the deceased’s estate to do so.

However, all the creditors need to be identified which is why most executors place an obituary in a local newspaper.

Creditors should be asked to provide a detailed statement of what a deceased person owes. Moreover, once they’ve been notified of a person’s passing, they should stop taking any money from their account.

Only after receiving all the deceased liabilities and asset details can an executor or administrator start paying non-priority debts to creditors.

What happens if someone dies owing income tax?

The amount owed in taxes to Her Majesty’s Revenue & Customs is usually paid using money from the deceased estate. The balance is then shared with their heirs and any beneficiaries of the person’s will.

Check out this question a concerned person asked on a popular forum:

Source: Moneysavingexpert

Does Life Insurance cover debts after you die?

Yes. Sometimes a life insurance policy will include a clause that pays off debts when a person dies. Like this, the deceased person’s estate is not used to clear any money owed to creditors.

It’s always worth checking the small print if you have life insurance to see if this is the case.

How does HMRC take money owed after death? 

As mentioned, if a deceased person owes money to HMRC the amount is taken from their estate.

For instance, if the person owes HMRC £3,000 and leaves savings of £10,000, the outstanding is paid out of it.

In short, the tax owed to HMRC is not forgiven when a person dies. Her Majesty’s Revenue & Customs will ask for any outstanding national insurance contributions and tax to be paid.

Are family members liable for taxes owed to HMRC?

If there’s no money in the kitty to pay HMRC, liability doesn’t fall on the deceased family members or next of kin to pay what’s owed.

In some instances, a Local Authority will wipe off any money owed on a Council Tax bill, but it’s at their discretion to do so.

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How do you contact HMRC about a deceased tax debt?

Fortunately, HMRC has dedicated helplines for executors to ensure no mistakes are made. I’ve listed their contact details in the table below:

What about Council Tax Debt when someone dies?

Council Tax debts are generally paid back by taking what’s owed from the deceased person’s estate providing they were the sole occupant.

That said, if a property is shared with another person, the debt falls to the other person to settle when the other person dies. This is because the surviving occupant is deemed to have benefitted from living in a shared property.

Moreover, even if the surviving person’s name is not on a Council Tax account, whether it’s a partner, spouse or relative, they’ll be liable for the debt.

However, if the deceased person’s estate has the funds to pay their Council Tax debt, this money could be used to settle their debt.

It’s worth noting that the same rule applies to water bills too.

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Can a Council Tax debt be written off?

Yes. Local authorities have the power to write off money owed to the council if a deceased person had fallen into arrears.

However, it’s at the council’s discretion to do so although most local authorities will consider the request and are usually sympathetic.

Will HMRC take Life Insurance Benefits to pay off tax debts?

Creditors cannot take any money from a deceased person’s Life Insurance Benefits to pay off debts.

All proceeds from a life insurance policy go straight to the beneficiaries as they are not deemed part of a deceased person’s estate. Unless there’s a clause in the policy to do so.

It’s also worth noting that the proceeds of a life insurance policy could be added to an estate if any beneficiary names in the policy are deceased as well. 

In short, the money in a life insurance policy could be used to pay off creditors.

What if there’s not enough money in the deceased estate?

If there isn’t enough money in a deceased person’s estate to pay their debts, their estate is deemed ‘insolvent’. In short, an insolvency administration order could be issued.

Should this happen all the deceased outstanding debts are written off which includes priority and non-priority debts.

However, any funds available in the deceased estate are used to pay off money owed. But it means certain creditors get paid first. 

For instance, Her Majesty’s Revenue and Customs is at the top of the list!

If an error is made when it comes to who gets paid first, the consequences can be far-reaching and expensive.

As such, it’s essential to seek legal assistance if the deceased person’s estate has enough money in it to pay the debts or not.

What happens when all the deceased debts are paid?

Once all a deceased person’s debts are paid, the balance of funds and assets are distributed to the named beneficiaries of a will. This could be family members, next of kin or it could be a favourite charity.

What role does an administrator or executor play?

The party responsible for dealing with a deceased person’s tax affairs is known as the executor or administrator. They are named in the deceased Last Will and Testament.

However, if the person dies intestate, which in short means there’s no Will, the person responsible is called an administrator. This is typically a family member.

However, in Scotland, the person responsible is known as an executor.

That said, if there’s no will and no surviving next of kin or family, HM Treasury deals with the administration of the deceased Will.

It’s worth noting that an administrator or executor could also be called the deceased ‘personal representative’. A solicitor may be needed to assist them when dealing with who gets paid first.

Lastly, what happens to tax debt after you die?

If you have tax arrears when you die, the administrator or executor of your will deals with all money owed to HMRC and other creditors.

The amount owed in taxes is settled using funds in your estate with the taxman being first on the list to pay.

That said, if money is owed in Council Tax, the local authority has the power to wipe off the debt. But it’s at each council’s discretion to do so!

The long and short of it is that owed taxes don’t die with you when you pass away. The amounts owed must be reconciled and paid by the administrator or executor out of your estate!

You should seek advice from a tax expert if you’re worried about leaving loved ones to deal with the problem. You may even be able to make sure all your taxes are kept up to date with the help of a tax expert!

Thanks for taking the time to read my post about tax after death and how pays and deals with things. I hope the information helps you better understand the role of an executor/administrator and how to set things up so the situation is less upsetting for loved ones.