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What happens to investments when someone dies?


Figuring out what happens to investments when someone dies in the UK can be difficult if you are the person who is responsible for seeing that the wishes of the deceased are carried out correctly. Not only have you to deal with the sadness of losing that person, but you may also have to understand the rules and regulations of inheritance tax. We hope that this blog will help you to navigate your way through it.

What happens to investments when someone dies?: Summary Table

❓ What is the Inheritance Tax threshold (IHT) in 2022-23?£325,000
🧑‍🤝‍🧑 Who can deal with the deceased’s assets?• Named executors/administrators
• Surviving spouse/civil partner
🏦 What is the inheritance tax payable on a deceased’s estate?40% on anything above the IHT threshold
🤔️ Who can inherit the deceased’s assets under ‘intestacy’ rules?• Primary beneficiaries
• Surviving spouse/civil partner
• Children
• Certain relatives

Administering a will when someone dies?

When someone dies, their assets, which may comprise money, shares, property and possessions (also known as their estate), are usually passed on under the terms of their will, overseen by the administrator or executor.

If the deceased passed on intestate (without having made a will), the person to whom the responsibility to distribute assets falls is usually the

If you’re appointed as an executor in the will, you will have to apply for probate to the courts to gain a grant of probate. In the event of the deceased dying intestate, the closest relative (surviving spouse or civil partner) or someone determined by a pre-set hierarchy based on the person’s relationship to the deceased will usually be appointed.

The executor must apply to the probate registry. A non-executor must apply for a grant of letters of administration. Those dealing with probate are collectively known as LPRs (legal personal representatives).

Whoever is appointed will be held responsible for the assets from the deceased’s death date to the date when the entire estate has been distributed – a period referred to as the “administration period.” Deaths must be reported within 5 days.

When do you pay inheritance tax?

What happens to investments when someone dies as far as inheritance tax is concerned is that the people to whom parts of the estate are bequeathed are not expected to pay inheritance tax unless the value of the bequeathment is more than £325,000 and the will-maker dies within 7 years. In other words, there is no tax liability on small estates valued under £325,00.

The tax threshold can change when a property is part of the estate. If this is the case, the property is bequeathed to children or grandchildren, and its value is less than £2 million, the tax threshold increases to £500,000.

If a property is sold during probate, some months after the date of death, and the price has increased from the initial valuation, if the price breaches the set threshold, you may have to pay Capital Gains tax.

You might also be expected to pay income tax if you receive rental income on a property that was bequeathed to you.

You can learn more about what happens to investments when someone dies in the UK and the workings of inheritance tax, its allowances, rules and thresholds on the Gov.UK website.

Do shares have to be distributed upon the death of a UK resident?

Handling shares during the probate process can be difficult, especially if the person charged with the responsibility is unfamiliar with the technical jargon often used during these types of transactions. In addition, it could be even more complex if the paperwork necessary to sell or transfer the shares is missing.

LPRs have to check the provisions in the articles of association and look into any shareholders’ agreement that might apply to shares, as they could affect the distribution. If these provisions reflect the wishes expressed in the will, no problem. If they don’t, the provisions and the shareholder’s agreements take precedence.

Technically, whatever transpires,  you have 12 months from the deceased’s death to sort out and distribute the estate. After this time, you might become liable for the payment of interest on any undistributed assets.

You can read more about what happens to shares when someone dies in the UK, and in particular, the transfer of the shares of a person who died as a shareholder, on the lawbite.co.uk website.

How are Stocks and Shares ISAs treated after death?

Suppose the deceased had decided on an investment strategy that included a Stocks and Shares ISA in their investment portfolio. In that case, the same rules apply when distributing the deceased’s estate.

A Stocks and Shares ISA contains various equities often spread across several industries or sectors. If the ISA provider hasn’t heard anything after 3 years and 1 day following death, the ISAs will be closed.

How are ISAs and stocks, and shares valued after death?

All assets, including stocks and shares, ISAs, general investment accounts, and property, are valued on the date of the death of the owner. This value is then used to calculate whether any inheritance tax is due and, if so, how much.

What happens to shares when someone dies in the UK, and the shares are listed on the London Stock Exchange is that you can use the price shown in a newspaper or its website or on a commercial website. For valuation purposes, use the closing price, but don’t forget that the prices shown in a newspaper are the closing prices on the previous day. Alternatively, you can have them valued by someone professional, such as a stockbroker.

If a dividend is due, the shares will be coded “XD.” The value of the dividend must also be included in the estate.

If the investment is a Stocks and Shares ISA, you should approach the ISA provider for a valuation.

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You can find out more by reading the “Valuing stocks and shares for Inheritance Tax” webpage of the Gov.UK website.

Can share ownership be transferred without probate?

It is possible to transfer share ownership without probate if the company’s board of directors are willing. In some instances, they could accept other evidence of the shareholder’s death, such as a certified copy of the deceased’s will.

How pensions are treated after death

What happens to your pension when someone dies depends on the type of pension in question. As this blog concerns investments, we concentrate on what happens to investments when someone dies in the UK when those investments are private pensions.

Firstly, how the deceased’s pension is treated depends on what type of private pension it is – whether it’s a defined benefit or defined contributions pension.

If it’s a defined contributions pension, and you die before reaching the age of 75, it is passed on to your beneficiaries tax-free. However, a claim must be made within two years of your passing.

If you took a lump sum before you died, and money is still left in the fund, it becomes part of your estate. However, if you elected to take the drawdown option, your beneficiaries can access the funds without paying taxes. Generally, the same rules apply to SIPPs.

Defined benefits pensions are based on the deceased’s salary. If the deceased passed before they retired, payments after death are based on between two- and four-times salary.

With defined benefits pensions, spouses, partners, and dependent children may also receive a “survivor’s pension.” However, these are taxed according to the marginal income tax rate of the dependent.

If you inherit money as a beneficiary

If you are a named beneficiary and inherit money, you have several options, depending on your investor profile.

The first thing you might decide to do is to pay off or reduce any debts you might have. Credit card debt, for example, is very costly. According   moneysavingexpert.com chart, interest varies anywhere from 9.9% to 39.9% – the average being somewhere in the region of 25%. You’ll be hard-pushed to find an investment anywhere to match that type of interest.

Credit card debt is one type of immediate debt, and it’s essential to review your short vs long-term financial needs to make the best use of your inheritance.

Having sorted out your immediate debts, the amount of money that has befallen you will open various investment opportunities.

If, for example, you’ve inherited a modest amount of money, you should check out this article entitled “how to invest £10,000.”

If you are fortunate enough to have inherited a more significant sum of money, this article called “how to invest £100,000” will give you some valuable ideas and tips.

If you are new to investing

What happens to investments when someone dies in the UK is that some beneficiaries will tuck the money they are given into a bank account or an ordinary savings account. Usually, it’s because they want to keep the money somewhere safe. But the downside of doing this is the low-interest rates these accounts offer.

If you are not risk-averse, you might consider investing it. The interest your money earn could be substantially higher. If you do, it is advisable to chat with a financial services advisor that is authorised and regulated by the Financial Conduct Authority.

FAQ

What happens to investments when someone dies without a will in the UK?

An ‘administrator’ is assigned when there is no will to an estate or investment. The administrator is a personal representative of over 18 years who is usually a close relative. The list includes the surviving married spouse or civil partner, parents, children, siblings, or other relatives (if they are entitled to the estate). If the individuals listed above are deceased, their children may apply as an administrator.

What are the responsibilities of the executor or administrator of a deceased estate?

The executor or administrator of a deceased estate is personally responsible for the location and collection of assets, payments of all liabilities (debts and taxes), and the correct distribution of the deceased estate (money, possessions, and property).

How does inheritance tax work on deceased investments in the UK?

There is no inheritance tax (IHT) on a deceased estate (the property, money, and possessions) whose value is under the IHT threshold of £325,000. The IHT threshold allowance is called the ‘nil-rate band’. However, if the deceased home or home proceeds go to the children or grandchildren, the IHT threshold increases by an additional £175,000. Anything above the IHT threshold is taxed at 40%. However, there is a tax exemption if you leave everything above the £325,000 threshold to a spouse, civil partner, or charity.

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