Will Tax Come Due on an Estate During the Administration Process?

There are many different factors you’ll need to consider if you’re responsible for administering an estate. Some of these will be things you’re already aware of, others may not. Many people don’t realise that tax can come due on an estate during the administration process. 

Though inheritance tax can be a significant consideration for high value estates, this is not the only type of tax to consider. Income tax and capital gains tax can also play a role during probate.

If you’re acting on behalf of an estate, you’ll need to consider both:

  1. Any tax liability the person who has died had at the time of their death.
  2. Any tax that comes due during the process of administering the estate.

If any income tax or capital gains tax does accrue during the administration period, the personal representatives will be responsible for submitting relevant documents to HMRC and ensuring bills are paid on time.

Managing tax liability up until the time of death

The kind of tax liability someone might have at the time of their death will depend on their circumstances. If the person who has died was employed or self-employed, it’s possible there will be more to wind up in this area than if the person who has died was retired. 

Personal representatives will need to determine whether the person who has died was due to submit a self-assessment during the financial year of their death, or even the prior financial year. They will also need to liaise with HMRC to find out whether there are any additional income tax payments due to settle their account. 

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Why might tax come due on an estate during the administration process?

There are a number of reasons why additional tax might come due during the administration process. This is especially likely to happen in the case of more complicated estates when it takes months, or even years, to complete the administration process.  

Generally, if tax accrues during this time, it will be for two broad reasons: 

  1. Because the estate has continued to receive income since the death.
  2. Because capital gains tax is due on the profits of a sale of a chargeable asset.

If there has been further income after the time of death

Many estates will continue to receive income between the date of death and the date when the administration of the estate is finalised. This income will often be taxable by means of income tax. 

This may be applicable if:

  • Interest has accrued on bank accounts during the administration period.
  • The estate has continued to receive business income.
  • The estate has continued to receive rental income.

Gross income of an estate is usually taxed at rate of 20% (except in the case of dividend interest, which is charged at a rate of 7.5%).

Many estates will only earn a small amount of income, perhaps from interest on bank accounts. If the total income received by an estate is from bank account interest and totals less than £500, you will not need to report this to HMRC. 

If the bank account interest earned is more than £500, or if the income has come from something other than this (including dividend interest), you will need to notify HMRC. 

Capital gains tax

If assets such as property, shares or art are being sold on behalf of an estate, capital gains tax may accrue if the assets have gone up in value since the owner of the estate died and/or since they were valued for inheritance tax.

Capitals gains tax is only relevant if assets are being sold. If ownership of an asset is being transferred directly to a beneficiary, it will not apply. 

If any capital gains tax does come due, you will need to notify HMRC. If the tax is due to a sale of a residential property, this often needs to be reported within 60 days. In many other situations, capital gains tax that has come due can be reported to HMRC at the same time as any relevant income tax. 

Reporting tax due to HMRC

There are two ways to report any tax due to HMRC. Which method you need to use will depend on whether the estate you are responsible for is considered a ‘complex’ estate or a ‘simple’ one. 

An estate is considered ‘simple’ if:

  • It is worth less than £2.5 million.
  • The income tax and capital gains tax owed for the administration period is less than £10,000 combined. 
  • The estate has not sold more than £500,000 worth of assets during a single tax year. 

If any of these do not apply, then the estate must be considered ‘complex’. 

If you need to report tax that has come due on a simple estate, this is usually done using the ‘informal procedure’. To do this, you must write a letter to HMRC at the end of administration period including:

  • The personal representative’s name and contact details.
  • Details of the person who has died (including their National Insurance number and Unique Taxpayer Reference).
  • Details of any income tax and capital gains tax that has come due during the administration period.
  • Details of any income tax and capital gains tax that has already been reported and paid during the administration period. 

Once HMRC receives this, they will tell you how to pay the outstanding amount. 

However, if you are acting on behalf of a ‘complex’ estate, you will need to register with HMRC online in order to complete a self-assessment on behalf of the estate. 

Seeking professional support

Tax liability can be a very confusing part of administering an estate, especially for larger estates with significant income. It’s really important to make sure this has been dealt with carefully, as personal representatives may find themselves liable for any mistakes made. 

Many personal representatives find it helpful to seek professional help at this stage to ensure that both the best interests of the estate and their own personal interests have been met. If you’re looking for support in this area, our specialist probate solicitors are always on your side.  

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