Estate tax returns on death: what do executors need to do?

executor taxes

Obtaining a Grant of Probate or Letters of Administration (the latter usually applies when a will has not been made) can involve a lot of information-gathering to find out the probate (date of death) values for completing the required HMRC forms. These forms must be completed regardless of whether there is an inheritance tax liability.

This information ideally ought to include whether there is any income tax liability due at the date of death. There may also be a refund due to the estate (depending on the date of death).  Sometimes, this can take longer to find out because it requires HMRC PAYE correspondence to confirm. An accountant can often provide a calculation, which can then be verified with HMRC later.

Tax after death

This is not, sadly, where liability necessarily ends. Many executors do not realise that tax does not end on death and the ‘estate’ as an entity in itself is possibly liable for income and capital gains tax.

During the estate’s administration period, which runs from the date of death until the conclusion of the administration (i.e., when all assets have been collected in, liabilities paid and the estate is ready to distribute), there may be income arising. This can come from bank accounts or stocks and shares (whether held individually with share registrars or within portfolios).

Unlike individuals during their lifetime, the estate does not have ‘personal allowances’ and therefore theoretically all income is potentially taxable. I say ‘potentially’ because there are some exceptions to this, where HMRC makes concessions (reviewed each tax year), which means that smaller estates may not need to pay any income tax, provided that certain conditions are met.

Otherwise, the estate will need to pay income tax and this may be by:

  1. Filing a full tax return for the estate (SA900), or
  2. The informal return process. The conditions for this should be checked, to ensure the estate qualifies for the informal basis.

Additionally, it may be necessary to provide beneficiaries with certificates to confirm the deduction of income tax (this can vary depending on beneficiaries’ circumstances and the question of costs proportionality being taken into account).

This is an often-overlooked duty. Many executors assume that getting the grant is the ‘main’ job and thereafter the main focus is on getting funds to beneficiaries as soon as possible. However, care needs to be taken to ensure that the income tax (and capital gains tax) position is checked, returns filed, and HMRC’s clearance sought, to properly safeguard the executor and beneficiaries.

Pippa Bavington TEP is an Associate Solicitor Private Client with Giles Wilson in Leigh on Sea, Essex


Disclaimer

An article of this kind can never provide a complete guide to the law in these areas, which may be subject to change from time to time. The opinions and suggestions made within this article should not be interpreted as specific advice in relation to any particular individual or individuals. Neither STEP, the article author or their firm accept responsibility for any loss occasioned by someone acting or refraining to act on the basis of the opinions and suggestions contained in this article. More