How is an estate taxed on death and during its administration? Part 2
Although upon a deceased’s death the personal representatives are often aware of the need to consider the Inheritance Tax (IHT) position, it is easy to overlook potential liability for two other taxes – Capital Gains Tax (CGT) and Income Tax.
We have previously looked at the circumstances in which a deceased’s estate is liable to a charge to IHT. Last week, we also considered the key CGT issues that personal representatives should bear in mind when administering a deceased’s estate. This week, it is the turn of Income Tax which may also be a relevant consideration for personal representatives.
It could well be the case that the deceased has paid too much or too little Income Tax for the period beginning of tax year (April 6) up until date of death. Personal representatives should contact HMRC to adjust the tax calculation for the deceased and ascertain whether the estate is owed a tax refund or whether further tax is due. If the deceased was in receipt of taxable benefits then DWP should be notified too. The easiest way for personal representatives to do this is by using the Government’s ‘Tell us Once’ service as these and any other relevant public organisations are automatically notified of the death and will then liaise directly with the personal representatives.
Dealing with Income Tax matters for personal representatives does not stop there. The period of administration may last for many months or sometimes years and during this timeframe, Income Tax is chargeable on income that the estate received. This could include savings generated from investments or rental income on properties for example.
It is crucial for personal representatives to bear in mind that allowances available to the deceased prior to his or her death (such as the annual Personal Allowance currently worth £12,500 for the present tax year) are not available after the date of death to set against post-death income. This therefore means that as the estate is not entitled to any allowances, all income unless specifically exempt from a charge to Income Tax, such as prizes on Premium Bonds, is taxable.
The rates of tax are 20% for savings and rental income and 7.5% for dividend income. Unlike with Income Tax rates for an individual during their lifetime, these rates do not vary based on how much income is received and no higher rates are applied. However, when income is paid to a beneficiary, it could then be subject to tax at higher rates depending on the beneficiary’s own Income Tax position. Alternatively, if the beneficiary does not pay Income Tax then they may be able to reclaim payment of tax already paid.
In terms of who is responsible for Income Tax liability, as with CGT this rests with the personal representatives and depending on the specific circumstances, a tax return may need to be completed. In more simple cases, matters can be dealt with informally by the personal representatives and at present under interim arrangements, income does not need to be reported to HMRC or any tax paid where the only source of income is savings interest and the liability is below £100.
It can therefore be seen that personal representatives need to be aware of a variety of different Income Tax implications when administering an estate, as well as issues relating to IHT and CGT. The issue of tax needs to also be considered by trustees dealing with trusts incorporated into a deceased’s Will or created during their lifetime.
If you require any assistance in dealing with a deceased’s tax affairs or indeed need advice in administering an estate more generally, then please do not hesitate to contact a member of the Tax and Estate Planning department today.