Estate Tax Compliance

When someone dies there are two distinct tax elements to be reviewed and completed: -

1. The first element is the finalisation of the deceased's tax affairs up to the date of death.
2. The second element is the tax due on any income or gains received by the estate during the period of administration

 

If the deceased was registered for self-assessment

If the deceased was registered for self-assessment, the personal representatives (executors) will need to complete and file a tax return on death. This will cover the period from 6 April to the date of death. They will also need to complete any unfiled returns from previous years – something our team of estate tax advisers can handle on their behalf.

If the deceased was not registered for self-assessment

If the deceased didn’t complete a self-assessment tax return each year, it’s likely that HMRC will already have the necessary information to resolve the tax position. The personal representatives will receive a P1001 letter explaining what, if anything, they need to do.

Pay and Pensions

HMRC receives the final pay and tax details from employers or pension providers within 35 days of them receiving notice of death. The key task for personal representatives to complete is to make sure that employers and/or pension providers are aware of the death.

Bank Interest

Any bank interest figures HMRC holds are likely to be estimates. These will be corrected after the end of the tax year, once final details are received from banks and building societies. Unfortunately, this correction can take time – especially if the deceased passed away early in the tax year – which may cause delays in administering the estate. If the personal representatives have accurate interest figures, it’s a good idea to share this with HMRC as soon as possible, by letter or phone. It is important to check any calculations issued by HMRC as it is often the case that they do not have all the relevant tax information when sending out their tax calculation. This can result in an unwanted tax amendment being issued after the estate has been distributed. Our team can review the tax position for all estates and contact HMRC directly to make sure the tax position is finalised before the estate is distributed.

The period of administration runs from the date of death to the point at which the remainder of your estate is finalised. How tax is handled on any income and gains received during this time depends on whether or not the estate is considered ‘complex’. For non-complex estates, the tax due for the entire administration period can usually be dealt with by letter, using what are known as ‘informal arrangements’. However, if the estate is complex, it must be registered with HMRC, assigned a Unique Taxpayer Reference (UTR), and complete tax returns for each tax year the administration continues – which, in some cases, can take several years.

When is an estate simple or complex?

A non-complex (simple) estate must meet all three of the following criteria:

1. The estate has a gross value on the Grant of Probate or Confirmation of less than £2.5m.
2. The total income tax and Capital Gains Tax (CGT) due for the administration period is less than £10,000.
3. The sales of all assets (whether chargeable or not) is less than £500,000.

If the estate does not meet any of the above, then it will be considered complex. Therefore, if the deceased had a portfolio of assets (such as property, savings, businesses, investments, etc.) that will routinely generate more than £10,000 in taxable income each year after death, this will place the estate in ‘complex’ territory.

New de minimis rules for income tax

"De minimis" is a Latin term meaning "about minimal things." In tax, it refers to a small threshold below which certain obligations don’t apply. When an estate income is less than a ‘de minimis’ amount in the tax year, then the estate is said to have nil income, meaning there is no income tax to pay. From 6 April 2024, the de minimis amount has been set at £500. This covers all types of income and not just bank interest (which was its previous focus). However, if an estate earns more than £500 in that year, then all of the income will become taxable, not just the amount above the threshold. As an added benefit, when this income is later distributed, the portion within the £500 threshold will not be taxed again in the hands of the beneficiaries. There is no equivalent threshold for Capital Gains Tax (CGT), but the estate can still use the Annual Exempt Amount (AEA) in the tax year of death and for the following two tax years.

We have estate administration and tax specialists who can offer guidance on estate-related tax calculations and compliance. We also offer guidance and support to other accountants and solicitors on tax positions up to date of death and in the period of administration. If you need help dealing with the tax position of someone who has passed away, please contact a member of our Tax team.