When a loved one passes away, the focus for personal representatives is invariably Inheritance Tax. Income and Capital Gains Tax should not be far behind in your priorities, however.
Initially the personal representatives should focus on the income receivable and capital gains/losses arising during the period from 6th April to the date of death; as a tax liability or repayment will form part of the estate. This is not necessarily limited to income paid during that period.
The next consideration is the reporting requirements covering the period of administration. This following the date of death until the estate administration is complete. Again care is required in allocating income of the deceased to the correct period.
Income protected in wrappers such as ISAs can retain their status on a person’s death for three years. Capital gains rolled over or deferred by tax regimes like EIS will not crystallise on a person’s passing.
If interest (falling under £500) is the only income received during the administration period, you do not need to report the estate to HMRC.
Those dealing with simple estates can write to HMRC declaring income and gains generated within the administration period. Simple estates being:
- the estate was valued at less than £2.5 million when the person died;
- the total Income Tax and Capital Gains Tax due is less than £10,000; and
- you did not sell more than £500,000 worth of assets in any single tax year during the administration period.
Otherwise an estate tax return will need to be prepared and filed.
Points to consider:
- Personal representatives are not entitled to a tax-free personal allowance.
- Only basic tax rates apply, not higher or additional tax rates.
- Expenses cannot be deducted before applying tax, with the exception of a loan taken out to pay an Inheritance Tax liability (for a period of one year).
- Care is required in identifying income due to trustees versus personal representatives when a trust is created on death.
- A deed of variation does not revert to the date of death for income tax purposes.
- Income paid to beneficiaries will need to be reported on form R185 along with any basic rate tax credit.
- Where personal representatives sell assets during the administration period, they are entitled to the standard annual exemption, this is reducing to £6,000 for 2023/24 and £3,000 for 2024/25. The highest Capital Gains Tax rates are applicable, currently 20% for most assets and 28% for residential property sales.
- The 60 day report and pay facility for residential property applies to personal representatives.
- Principal Private Residence relief may apply in certain circumstances.
- Beneficiaries may be better off if the personal representatives transfer an asset to them for sale e.g. multiple annual exemptions and potential lower tax rates.
- Under certain circumstances personal representatives may claim Inheritance Tax relief where listed shares/unit trusts and land/property are sold for less than the valuation at the date of death.