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

Posted on By Louise Polcaro
A young biracial woman is reading a paper and looking at a laptop in a kitchen

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 Solicitors in Leigh on Sea, Essex

What are the tax implications of investing in cryptocurrency?

Posted on By Joanna Pegum
trader with phone and laptop

Most of us lead lives that are heavily digital. We think nothing of sending emails in our personal and professional lives, reading e-books and e-newspapers, taking and sharing digital pictures and videos, and meeting our family, friends and others on social media. Investing in cryptocurrency might seem a logical next step, but what is it, and what are the tax implications?

For the last decade and more, many people have invested in blockchain with a view to creating a global accountancy system for the ownership of possessions (both tangible and non-tangible). Cryptocurrencies, including Bitcoin, Ethereum and Ripple are a type of non-tangible asset. These currencies are digital in nature, are not formally issued by any central bank, and can be traded or used as payment globally.

Cryptocurrencies take a range of forms including:

  • exchange tokens that can be used as payment for goods or services (similar to traditional currency);
  • utility tokens that provide the owner with access to certain goods or services; and
  • security tokens that provide the owner with security for a debt or provide the owner with profits from the security.

Legal questions arising

Cryptocurrencies have created problems from a legal perspective. It is unclear whether they are truly assets with value that can be owned, and if they are, whether they can be legally transferred to others, say, through a will or a prenuptial agreement.

If the owner of cryptocurrencies has a connection to more than one country or jurisdiction, it is not clear whose laws would govern the transfer of the cryptocurrencies and whose tax regime the currencies would be subject to.

In late December 2019, HMRC issued some guidance on its view of the law surrounding cryptocurrencies, focusing on exchange tokens.

The location of exchange tokens

Exchange tokens are considered to be situated for tax purposes in the jurisdiction in which the owner is resident. This may have a greater impact on those who are non-domiciled but resident in the UK (and paying tax on a remittance basis), as the cryptocurrencies are treated as being situated in the UK and will be subject to UK tax. See where is my domicile, if you are unsure.

Exchange tokens belonging to individuals who are not resident in the UK are not subject to the UK tax regime.

Tax treatment of exchange tokens for UK residents

Capital Gains Tax

HMRC’s view is that the majority of owners  considers that the majority of owners purchase or are given exchange tokens on an infrequent basis, wait for the value to go up, and then sell them. Profits made on exchange tokens are therefore subject to capital gains tax in the normal way, and a liability is incurred every time the exchange token is disposed of (ie sold, transferred to another, or used as payment) at a profit.

It’s important to keep records of the dates on which disposals are made (and the value of the exchange token on that date) to ensure that tax returns are accurate.

Income Tax

HMRC may tax gains made on exchange tokens as income for substantial traders of exchange tokens – and note that income tax rates are generally higher than capital gains tax rates.

Equally, if an individual receives exchange tokens (or any form of cryptocurrency) as a result of employment, then that will also be subject to income tax and national insurance contributions.

Inheritance tax

The value of cryptocurrencies owned by an individual is treated as forming part of the individual’s estate, and will be subject to inheritance tax on their death. Note again, the owner’s country of residence is an important factor in deciding whether the cryptocurrencies will be subject to UK inheritance tax.

Keep proper records

If you have cryptoassets, you need to keep records of the following when disposing of them:

  • the type of cryptoasset;
  • the date of the transaction;
  • whether if they were bought or sold;
  • the number of units;
  • the value of the transaction in pounds sterling;
  • the cumulative total of the investment units held; and
  • bank statements and wallet addresses, if needed for an enquiry or review.

Where can I get advice?

A qualified professional can provide advice and help you to make the necessary disclosures on your tax return.

• See also Do I need to declare my cryptocurrency to HMRC?

Joshua Ryan is a solicitor at Weightmans LLP, London 

How is Capital Gains Tax charged on death?

Posted on By Joanna Pegum
man thoughtful by sea

When someone dies their estate is valued for probate purposes before being distributed to the person’s heirs. It is then potentially subject to Inheritance Tax (IHT), but is generally exempt from Capital Gains Tax (CGT); the rationale being that the same assets cannot be subject to both capital taxes. The beneficiary is treated as if they acquired the asset at its probate value. This is known as the CGT tax-free uplift on death.

It may be tempting for executors to down-value assets such as property, with a view to reducing the IHT bill, but this will only reduce the base cost of the asset, and potentially increase any CGT liability, so this needs to be considered.

Who should realise the capital gains – the estate or the beneficiaries?

Often the executors will sell some or all the assets, and then distribute the cash to the beneficiaries. In this case it is the executors who make any post-death gains/losses, so they will be responsible for formally registering the estate with HM Revenue & Customs and reporting any capital gains.

In respect of residential property disposals, it may also be necessary for the executors to complete an online 60-day capital gains tax return to report and pay any CGT due within 60 days of the date of completion of any property sale. The disposal will also need to be declared on any formal estate tax return which may be issued.

The executors are able to claim the full annual CGT exemption, currently £6,000 for 2023/24, reducing to £3,000 from 6 April 2024. The annual CGT exemption is available to the executors in the year of death and in the two following tax years. Any chargeable gains are subject to CGT at the higher rate, which is 28% for residential properties and 20% for all other chargeable assets.

There can however be some tax planning opportunities if assets are transferred to beneficiaries before they are sold. The beneficiaries can stagger the sales of assets over different tax years, and possibly claim multiple annual CGT exemptions. They can also utilise any personal capital losses they may have brought forward, and potentially pay tax at a lower rate than the executors, if any of the gains fall within their basic rate band, so they would pay tax at 10/18% instead of 20/28%.

What about the deceased’s CGT position in the year of death?

While CGT liabilities die with you, what about assets that the deceased has already disposed of in the tax year in which they die?

Any capital gains have to be disclosed on the deceased’s tax return for the period from 6 April to the date of their death, and they are entitled to a full annual CGT exemption.

Capital losses in the period to the date of death are automatically offset against any capital gains. Any capital losses brought forward can be offset, as long as any chargeable gains exceed the annual CGT exemption.

Any unused capital losses still remaining can be carried back and offset against any capital gains the deceased may have realised in the three tax years prior to the tax year of death. The losses must however be offset against gains in a later year, before setting them off against gains from an earlier year.

Katie Buckley is a Director of The Tax Angel Consultancy Limited

Do I need to declare my cryptocurrency to HMRC?

Posted on By Joanna Pegum
Attending to paperwork

There is currently widespread uncertainty about the tax treatment of cryptocurrency investments and trading activity.

If you have sold, gifted or spent cryptocurrency within the tax year, you may need to declare any profit or gains on your self-assessment tax return.

If you do not declare taxable income or gains, you may be liable to interest and penalties.

How much tax will I need to pay on my cryptocurrency?

Profits made on cryptocurrencies by individuals is generally subject to capital gains tax at a rate of up to 20% after deducting the annual allowance (£12,300 for the 2020/21 tax year). Where you have bought and sold cryptocurrencies through a UK company, any taxable profits will be subject to corporation tax at a rate of 19%. If you have regularly bought and sold cryptocurrencies, HMRC may say that you are liable to income tax at a rate of up to 45%. Most exchanges will keep a record of your transactions and let you download your history.

If I gift my cryptocurrency, am I liable to tax?

Under existing capital gains tax rules, if you gift your cryptocurrency or use it to buy other capital assets (including exchanging one cryptocurrency for another), you will have to pay tax on any increase in the value of your cryptocurrency between the date you acquired it and the date of the gift or purchase (subject to any available reliefs or allowances). Similar rules apply if you are subject to corporation tax or income tax on your profits.

How will HMRC know about my profits?

HMRC has significant powers to acquire and analyse information on UK taxpayers. If HMRC raises an enquiry into your tax returns, it is likely to question the appearance of profits in your bank account that have not been accounted for. The UK and EU are also currently consulting on new regulations that may require trading platforms to report information on certain account holders to the relevant national authorities.

What if I have made a loss?

If you have made a loss, you may be able to offset these losses against your cryptocurrency profits or other capital/trading profits. If you have bought and sold cryptocurrencies through a UK company and the company has made a loss on any individual transactions, loss relief may be available under the corporation tax loss relief rules. As mentioned above, many exchanges will keep a record of your transactions and let you download your history. It is essential to keep these records on file so that you can claim relief for any losses that you make.

What if I fail to declare any taxable profits?

HMRC has up to 20 years following the end of the relevant tax year to enquire into your tax returns. If you deliberately fail to declare taxable income or gains and tax has been underpaid, you may be liable to interest and penalties of up to 100% of the amount of tax due. In the most serious circumstances, criminal liability may apply.

Where can I get advice?

A qualified professional can provide advice and help you to make the necessary disclosures on your tax return.

Helen Cox is Partner in the Private Client Department at Fladgate, and Andrew Goldstone TEP is a Partner at Mishcon de Reya, London, UK