Personal representatives (executors/administrators) and solicitors are often preoccupied when dealing with estate administration, the many tasks include: obtaining probate, collecting & distributing assets, and dealing with Inheritance Tax matters.
Unfortunately, costly missteps are commonly made during the administration period (the period spanning the day after the date of death until the estate has been distributed), resulting in estates being exposed to avoidable Income Tax, Capital Gains Tax (CGT), and penalties imposed by HMRC.
We highly recommend that professional tax advice is sought early in the administration period to ensure that the estate is not costing itself unnecessary funds that would otherwise be distributable to beneficiaries.
Professional tax advice can have significant potential to both save tax and reduce the complexity of the reporting needs of the estate.
Estate Administration Reporting
So what does the personal representative need to consider reporting to HMRC?
The estate may incur CGT liabilities on the sale of chargeable assets.
Often tax can be saved by timing disposals to use the Annual Exempt Amounts for different tax years whilst these time-limited allowances still remain available.
It also often saves CGT when assets are appropriated (transferred) to beneficiaries before being sold by them personally.
We strongly recommend that this option is explored prior to disposing of properties.
Estates do not benefit from the same Income Tax allowances that are available to individuals.
So it’s worth considering whether Income Tax can be saved by appropriating income-producing assets to beneficiaries before the end of the administration period.
Please note that appropriating assets to beneficiaries may lead to an Income Tax liability for beneficiaries for the tax year of the transfer.
After Death Tax Relief
In certain circumstances, post mortem reliefs can be claimed to save CGT.
Additionally, relief might be claimable to save significant CGT if the main residence of the deceased is occupied by a beneficiary.
Valuation of assets
The value of assets for probate purposes is used as the cost for CGT purposes when selling chargeable assets.
Where assets have been undervalued and sell for more than expected it can often be worthwhile to apply for the value of assets to be updated in order to save CGT.
Reducing Tax Liabilities
Various costs can be utilised to reduce the Income Tax and CGT liabilities of an estate, such as interest paid on the first year of a loan used to pay IHT liabilities or the costs of obtaining probate (per actual costs or scale rates).
When it comes to Inheritance Tax, most of the potential tax savings depend on Estate planning in advance.
Estate planning is so easy to ignore until it is too late — don’t let that happen to you!
At Friend & Grant we can advise on how you can save on Inheritance Tax and, therefore, leave a bigger pot of wealth for your loved ones.
In addition, we can also discuss the tax implications of post-death planning, such as varying a will to create a will trust.
The Duties of a Personal Representative
Personal representatives often do not realise that an estate may be required to register with HMRC’s estate registration service, which is a separate process to obtaining probate, dealing with Inheritance Tax, and paying CGT on the disposal of UK residential properties.
Personal representative may also mistakenly believe that Self Assessment Tax Returns are not required because no tax is due or the estate’s liabilities have been reported via CGT UK Property Returns.
The level of complexity, gross value, and tax liabilities of an estate determine the estate’s reporting requirements, including whether the following are required:
- Registration with HMRC’s estate registration service.
- Self Assessment Tax Returns (SA900) for the tax years of the period of administration.
- CGT UK Property Returns.
- A letter to HMRC with supporting tax calculations and enclosures (the informal procedure).
If the only income received by an estate is bank interest not exceeding £500 then the estate will not need to report this to HMRC.
ISAs will continue to have tax-free status for Income Tax and CGT purposes for a limited time after death.
Do Beneficiaries need to do anything?
Beneficiaries may also have tax reporting requirements that need to be dealt with during the administration period.
For example, if either assets are appropriated or income is paid to beneficiaries, then R185 forms might be required and the beneficiaries could personally incur an Income Tax liability during the tax year of transfer.
The informal procedure will not be available and Self Assessment Tax Return(s) will be required for the estate if any of the following apply:
- The total Income Tax and CGT due for the administration period was more than £10,000.
- The estate was worth more than £2.5m at the date of death.
- More than £500,000 a year came from the sale of the estate’s assets (assuming the date of death was after 6 April 2016).
Submitting CGT Returns
Regardless of whether Self Assessment Tax Returns are required, CGT on UK Property Returns need to be submitted within 60 days of completion on the sale of UK residential property if either CGT is due or the deceased lived abroad.
Getting in touch with us
Friend & Grant are well versed and happy to help in all tax maters relating to estate administration, we can also provide an efficient and swift grant of probate application service.
If you require assistance with any of the matters discussed above, we are always available to talk.
Contact James Thomson on or call us on 01634 731390 to arrange a meeting.
If you would like to find out more about some of our services that might help you please take a look at our related pages:
Take a look at our other blogs on the topic of Estate Planning
Have you considered trusts for holding family investments?
Tax trap! Is your estate worth between £2 and £3 million? If so you could lose valuable allowances
The content in this blog is correct as of 3 April 2023. See terms and conditions.