While Inheritance Tax is indeed a crucial aspect of compliance, it is important not to overlook the requirements for income tax and Capital Gains Tax by executors and other personal representatives (PRs) handling the estate.
For smaller estates, it may be possible to handle these matters informally with HMRC, however, larger estates, including those with saleable assets valued at over £500,000, may necessitate estate registration and the completion of full estate tax returns.
The situations that require estate registration with HMRC for deaths occurring on or after the 6th of April 2016 are as follows:
When the estate's value exceeds £2.5 million
When the proceeds from the sale of assets in any given tax year exceed £500,000
When the total income and capital gains tax liability for the entire administration period is likely to be £10,000 or more
If estate registration is necessary, HMRC requires specific information about the deceased and the executors/PRs, which should already be readily available as it is also required for the Inheritance Tax account.
In this scenario, PRs have six months from the end of the tax year in which a liability arises to notify HMRC of the need for an estate tax return. Failure to meet this deadline can result in a late notification penalty being charged.
The applicability of income tax depends on the types of assets in the estate and is levied on dividends or distributions from investments, interest from savings, rents, and other forms of income. The applicable income tax rates for PRs are 8.75% on dividend income and 20% on savings and other income.
For the three tax years prior to the 6th of April 2019, HMRC has waived the requirement to report or pay tax if the only source of income is savings interest or the liability is less than £100. For deaths occurring on or after the 6th of April 2018, if an estate includes ISAs, they are treated as continuing and retain their pre-death tax advantages until either the completion of the estate administration, the closure of the ISA or the expiry of three years from the date of death.
During the estate administration period, Capital Gains Tax applies to the capital gains realised from the sale of assets by the PRs. These gains are calculated based on the net sales proceeds minus the value of the asset at the date of death (probate value). PRs are also entitled to an additional allowable expense, calculated on a sliding scale, to compensate for the cost of obtaining title to the asset being sold.
Any resulting tax due is payable from estate funds. PRs can avail a full CGT annual exemption for the period between the date of death and the following 5th of April, as well as each of the next two tax years.
There are certain accepted tax planning opportunities available to PRs that can mitigate CGT. While these can be effective, caution must be exercised to ensure the most tax-efficient approach is taken without impacting beneficial entitlement, especially when there are non-resident beneficiaries!
Each estate's circumstances are unique and I can help those handling estates with their Income Tax and Capital Gains Tax compliance obligations.
Until next time ...
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about Income Tax and Capital Gains Tax Issues for estates, do give me a call on 01908 774323 and let's see how I can help you.
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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