When considering the tax issues surrounding a deceased person’s estate, most people will think of Inheritance Tax. While this is often the most significant area of tax compliance that needs to be dealt with, executors and other personal representatives (PRs) should not overlook the income and capital gains tax requirements for an estate.
For many smaller estates, it may well be possible to deal with these matters on an informal basis with HM Revenue & Customs (HMRC). However, for larger estates, including those with saleable assets valued at over £500,000, it may be necessary to register the estate and complete full estate tax returns.
The occasions where an estate has to be registered with HMRC are, for deaths on or after 6 April 2016, when:
- the estate is valued at over £2.5 million; or
- the proceeds from the sale of assets in any one tax year exceed £500,000; or
- the total income and capital gains tax liability for the whole period of administration is likely to be £10,000 or more.
If the estate does need to be registered, HMRC requires certain information about the deceased and executors/PRs, all of which should be readily available as it is also needed for the Inheritance Tax account.
In this situation, PRs have six months, from the end of the tax year in which a liability arises, to notify HMRC that an estate tax return is needed. If this deadline is not met, HMRC can charge a late notification penalty.
This will depend on the types of assets in the estate, and is levied on dividends or distributions from investments, interest from savings, rents and other kinds of income.
The applicable rates of income tax for PRs are 7.5% on dividend income and 20% on savings and other income.
For the three tax years ending prior to 6 April 2019, HMRC has agreed that there is no requirement to make a report or pay tax where:
- the only source of income is savings interest and
- the liability is less than £100.
For deaths on or after 6 April 2018, where an estate included ISAs, these are treated as continuing and will, therefore, retain the pre-death tax advantages until the earlier of:
- the completion of the administration of the estate;
- the closure of the ISA, or
- the expiry of three years from the date of death.
Capital Gains Tax (CGT)
During the period of estate administration, CGT applies to the capital gains which are realised on any assets sold by the PRs.
Such gains are calculated with reference to 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, which is intended to compensate them for the cost of obtaining title to the asset being sold. Any resulting tax due is payable from estate funds.
A full CGT annual exemption (£12,000 from 6 April 2019) remains available to the PRs for the period from the date of death to the following 5 April and in each of the next two tax years.
The applicable rates of CGT for PRs are 28% on residential property and 20% on all other assets.
There are some accepted tax planning opportunities available to PRs which can mitigate CGT. While these can be effective, care needs to be taken to ensure that the most tax efficient route is taken without impacting on beneficial entitlement, and also where there are non-resident beneficiaries. Professional advice should always be sought before undertaking such measures.
The circumstances of each estate are unique. We have significant experience assisting PRs with their income tax and CGT compliance obligations and will be pleased to answer any questions you may have.