Estate of Mind – Dealing with tax compliance affairs on death including estate tax returns

Dealing with tax is not always the top priority when dealing with the loss of someone close to you. So, here are some tips to help you navigate your way through this difficult time. We advise on ways you can reduce the burden of compliance at such a difficult time.

Don’t confuse completing a trust and estate tax return with the requirement to complete separate returns. This is in respect of any Inheritance Tax liabilities the estate may owe. These have different time limits for submission of the forms and payment of any liabilities. They are often earlier than the need to file tax returns in respect of the income and gains of deceased person or their estate.

Are there any outstanding issues with the deceased’s tax affairs?

There may be more than one tax year that needs dealing with. For someone that dies early on in a tax year (say 1 May 2021), it is unlikely that their tax affairs for that tax year are final before their passing. There will also the short period from 6 April 2021 to 1 May 2021 in the tax year 2021/22 to consider. The consideration is whether a Tax Return requires completion.

For individuals that had an existing tax agent, it is worth noting that Agent Authority lapses on death and it is necessary for a new 64-8 to completed and submitted by the personal representative so that your adviser can continue to speak to HMRC.

Does a tax return need to be prepared for the deceased?

If HMRC issue a tax return, then they do need completing. It is the responsibility of the personal representatives to ensure that income and gains they report to HMRC are correctly. Also, it is their duty to approve and sign the return.

Who pays any tax that is due?

You pay tax up to the date of death out of the assets of the estate. The personal representative pays. If there is no money available because they are yet to grant probate, the personal representative may need to arrange a loan to pay the tax due.

Who receives any tax refund that is due?

The refund will be payable to the estate.

What are the time limits for finalising the tax affairs of the deceased?

You should file any tax returns that HMRC issue by 31 January following the end of the relevant tax year.

A tax return for the tax year 2020/21 is due to be filed electronically by 31 January 2022; a tax return for the period from 6 April 2021 to the date of death in 2021/22 is due to be filed electronically by 31 January 2023.

Where a tax return is to be filed on paper, different deadlines apply. It is important that you should try and finalise the tax position of the deceased as soon as possible.

Dealing with Estates in administration

Personal representatives also have a duty to report to HMRC any untaxed income and capital gains that arise during the period of administration. From 6 April 2016, you no longer deduct tax was no longer at source on bank accounts. Also, the abolishment of dividend tax credit took place. Currently, the legislation requires a report for even small amounts of investment income arising within an estate. Consequently, requiring paying tax.

The administration of some complex estates can run into several years and it will be the responsibility of the personal representatives to consider whether a tax return needs to be filed throughout the period of the administration. HMRC do charge penalties on the late submission of a trust and estate tax return, as well as interest and surcharges on tax not paid on time.

Personal Representatives are not entitled to savings allowance in the same way that individuals may receive up to £1,000 of gross interest without an income tax charge and they are also not entitled to the dividend allowance applicable to the first £2,000 of dividend income.

If the estate sells a residential property, there is still a requirement to report and pay any Capital Gains Tax payable within 60 days of completion, unless the administration of the estate will be finalised within that time whereby the gain can be reported by letter as set out below.

Informal arrangements

As described above, untaxed estate income and capital gains need to be reported on the trust and estate tax return. For straightforward estates where the tax liability is small, HMRC recognise the need for simplicity and have adopted an informal procedure to settle the tax affairs.

The informal procedure requires a written summary of income and gains, and a computation of the estate’s tax liability. The whole period of administration should be reported together. Secondly, if the administration has ceased, it is not necessary to wait until after the end of the tax year. Once HMRC have agreed the tax they will issue a payslip and reference number to settle the liability.

This informal approach means that most estates avoid being in the self-assessment system. There is no requirement to register the estate, or to complete a tax return.

Additionally, the time limits, interest and penalties of the self-assessment system do not apply.

What are the limits for informal arrangements?

The standard criteria for adopting informal procedures are as follows:

• The total tax liability (income plus capital gains) for the whole period of administration is less than £10,000
• The probate value of the estate is less than £2.5m
• The proceeds from assets sold in any one tax year is less than £500,000 (or less than £250,000 before 5 April 2016)