Topic

Estates in Administration

Personal representatives are responsible for making sure any pre-death income tax due or repayable is dealt with under Section 74 of the Taxes Management Act.

The personal representatives should complete all outstanding tax returns of the deceased, including for the final period from the 6 April to the date of death.  

The Administration Period

The personal representatives are liable to pay income tax but they have no personal allowances. The rates of tax are currently: 

7.5% for dividend income 

20% for all other income 

Generally, income is received without deduction of income tax and the personal representatives have to account to the Inland Revenue for income tax due.  

Under Section 682A of the 2005 Act, if a beneficiary of an estate makes a written request, the personal representatives must provide them with a tax deduction certificate regardless of whether the beneficiary has a limited or absolute interest in residue or is a discretionary beneficiary. The Certificate is a Form R185 (Estate Income).  As a charity is exempt from paying certain taxes, this form can be used to reclaim the charity’s proportionate share of the tax paid during the administration period, in the year that a distribution is made.

Deductions from Income 

Personal representatives are generally not allowed to deduct expenses from income when calculating their liability to income tax, unless the expenses relate to trading and are wholly attributable to the business being carried on.  

The exception to the above general rule is that personal representatives are entitled to deduct interest on an initial loan obtained to pay inheritance tax for the period of twelve months from the date of the loan under Section 403 of the 2007 Act.  

Time limits 

The deadlines for submitting tax returns under self-assessment: 

For Paper Tax Returns – 31 October following the end of the tax year; and  

For Online Tax Returns – 31 January following the end of the tax year. 

Payments on account of a liability to tax in January and July during the tax year are required where the income tax payable to the Inland Revenue in the previous year was £500 or more. Otherwise tax is due on 31 January following the end of a tax year.  

Informal Arrangement 

HMRC prefers personal representatives to follow an informal arrangement for declaring their liability to tax during the course of administration provided the estate is not complex.    

If the personal representatives are able to use the informal arrangement then they submit a computation of their tax liability to HMRC and pay the sum calculated to be due     

The main condition for using the informal procedure is that the liability to income and capital gains tax for the administration period is £10,000 or less in total. The other conditions are: 

  • The Probate value of the estate is no more than £2.5M 
  • The proceeds of sale of assets in any one tax year are £500,000 or less (up to 2016 the figure was £250,000); and 
  • The estate is not considered to be complex. 

If the estate is considered to be ‘complex’ (generally where it does not meet the above conditions) a self assessment return must be submitted for each tax year of the period of administration.