If you are administering an estate of someone who has died, then as the personal representative you need to make sure that you understand how to deal with the income tax and capital gains tax in the administration period.
The administration period is the time from the date of death to the date that everything has been paid out or distributed in an estate.
From 5 April 2024 estates with all types of income up to £500 in every tax year of the administration will not pay income tax and that income does not need to be reported to HM Revenue and Customs.
At the other extreme certain estates must be registered for Self-Assessment with HM Revenue and Customs and they call these estates ‘Complex Estates’. A ‘Complex Estate’ is one which:
- (i) has assets of over £2.5 million or
- (ii) where assets are sold in any one tax year of over £500,000 or
- (iii) where the total tax liability (income tax plus capital gains tax) due over the whole administration period is over £10,000.
The registration is done online through HM Revenue and Customs Trust Registration Service and a Unique Taxpayer Reference is sent to the executor in the post. This is different to the Unique Taxpayer Reference that the deceased would have had if they were completing lifetime tax returns and it is important not to muddle them up!
Once the estate is registered as a Complex Estate expect Tax Returns to be issued and it is important that these are submitted on time or penalties will be issued.
If the estate is neither ‘Complex’ nor has less than £500 of income in every tax year, then HM Revenue and Customs should agree to deal with the income tax and capital gains tax in the estate informally by letter at the end of the administration period. See https://www.gov.uk/probate-estate/reporting-the-estate
Estates do not get any personal allowances for income tax and pay tax at the basic rates of 8.75% on dividends and 20% on all other income. The personal representatives should give the beneficiaries tax certificates to show them their share of the income received and tax paid, so the beneficiaries know what to put on their own tax returns.
During the administration period, ISAs are not subject to income tax or capital gains tax for three years from the date of death or when they are closed, sold or transferred. So, the income and gains from ISAs do not need to be put on the estate tax return or declared informally or included in the £500 tax-fee amount during this time.
From 6 April 2024 estates have an annual capital gains tax allowance of £3,000 and an ordinary capital gains tax rate of 20% with an additional 8% for residential property. If you sell a property at a gain from the probate value in the administration period do take advice before you exchange contracts to see if you can reduce the Capital Gains tax due.
If there is a chargeable gain on a residential property, then the personal representatives will need to complete a Residential Property Capital Gains Tax return within 60 days of completion and pay the capital gains tax. Be careful when you come to complete the capital gains tax pages of the estate income Tax Return (if one is required) with the same information and don’t forget to fill in box 5.8A with the capital gains tax that you have already paid so it all ties up nicely with HM Revenue and Customs records.
Tax in the administration should not be too complicated or too onerous, it just needs the personal representative to keep good records and know what needs to be done and when. If we are instructed on a full administration of an estate, we will advise you as appropriate throughout the administration to ensure that the obligations of the personal representative re tax in the estate are all met.
Please can tact me, Lucy Hollingsworth if you need any advice on the above.