Back in February 2017 I considered the impact of the income tax changes on a deceased person's estate following Budget 2015. It was a rollercoaster ride of the thrills and spills surrounding the income tax position for the administration period. Ok, in reality it was more "Slow and Sedate" than "Fast and Furious" but this is tax we are talking about.
Since that article the rules have changed and this seems like a good time to refresh the franchise – Slow and Sedate 2.
Everyone is now comfortable with the fact that all estate income is pretty much now received gross. There are exceptions of course but they are unusual so I'm ignoring them here. I might save that topic for Slow and Sedate 3…
If the only income received in the period of administration is interest, and that interest totals less than £500, the executors won't have to account to HMRC for income tax. This supersedes the de minimis rule referred to in my previous article that set the limit at £100. This increase in the de minimis is good news as it gives more leeway to executors when holding funds prior to distributing under the terms of the Will.
Anyone who deals with estates on a regular basis will know that the dividend allowance an individual receives when alive is just not available after death. Strictly speaking, any dividend income received should be notified to HMRC and tax paid thereon. This can be a bit of a pain when looked at in conjunction with the de minimis referred to above.
Many people have some shares left over from when their old building society demutualised and dividends are regularly received. If the executors receive £400 of gross interest they wouldn't have to pay tax or even notify HMRC if this is the only income. The de minimis applies as mentioned above. The same executors then receive a £30 dividend from some free shares held by the deceased. All of a sudden the de minimis doesn’t apply and the executors need to make a payment to HMRC of the tax on the dividend and also the interest received.
Admittedly the tax amounts are small but there is the faff of dealing with HMRC which also increases costs where professional advisors are used. When distributions are subsequently made from the estate R185s will be needed to report the net income. If the de minimis applies, as the only income is interest less than £500, then R185s aren't needed as no tax will have been paid.
Further changes were announced in November 2017 under the snappily titled Individual Savings Account (Amendment No 3) Regulations 2017. For deaths after 6 April 2018, any investments that are in ISA wrappers will remain tax free (income tax and capital gains tax) after death for a period of up to three years whilst in the estate. This change will reduce the tax burden for many estates and is definitely welcomed.
All that being said, none of the changes affect how the income is taxed in the hands of the beneficiary receiving it from the estate. Whether tax is paid by the individual will depend on their own tax position.
As with anything tax related, understanding of the rules is paramount in making sure the right amount of tax is paid. Executors have a degree of responsibility to get things right and the income tax and capital gains tax positions are part of this.
If you would like to know more about the tax implications of dealing with an estate, or are keen to know when the next instalment of Slow and Sedate will be released, please contact Marc Dorsett on firstname.lastname@example.org or 01245 228146.
This is not legal advice; it is intended to provide information of general interest about current legal issues.