How is an estate taxed during administration?
In this section we look at how an estate is taxed during the period from death up until the estate is ‘wound up’ or finalised (‘the period of administration’).
General information about the taxation of an estate
The period between the day after someone’s death and the date the executor or personal representative finishes distributing the assets according to the will or the laws of intestacy is known as the period of administration.
This period is separate from the period up to the date of death for taxation purposes. The estate of the deceased during this time is taxed separately from the deceased prior to death and the deceased’s survivors or beneficiaries. During this time the estate is taxed in its own right without reference to the taxation of anyone else, including those administering the estate.
If the value of the taxable estate (including any gifts made in the seven years prior to death) exceeds the nil rate band (and residence nil rate band, if applicable), inheritance tax (IHT) will be payable. For more information on the personal representative’s responsibilities with regards to inheritance tax, visit the section ‘how do I assess an estate for inheritance tax purposes?’
In addition, the executor may have to deal with income tax and capital gains tax (CGT) for the deceased’s estate during the period of administration and we look at these in more detail on the rest of this page.
An executor or personal representative can use an agent to deal with some of the tax affairs of the estate if they do not feel confident to deal with them themselves. Their professional fees are paid out of the estate. For information on where to find an agent, see our ‘more information’ section.
Tell me about the estate and income tax
The administration period during which the executor or personal representatives deal with the estate may last some months or even years.
During the period of administration, income tax applies to income that the estate receives. Such income may arise, for example, from investments held by the deceased at the date of death.
Note that personal allowances are not available to the executor after the date of death to set against post-death income. Note also that the personal savings allowance and dividend allowance are not available to the executor after the date of death.
Since the estate is not entitled to a personal allowance, all income is taxable (unless the income is specifically exempt from income tax, e.g. premium bonds. See also the section on ISAs below).
From 6 April 2016 onwards, banks and building societies do not deduct tax at source from interest on savings accounts. If the estate receives bank or building society interest, the estate will have to pay tax on the interest received. If the estate includes rental property and receives rental income, the estate will have to pay income tax on the rental profits (there is more information on working out rental profits in our section ‘property income’). If the estate includes company shares and receives dividend income, the estate will have to pay income tax on the dividend income.
On income arising after the date of death, the rates of tax are:
- Savings income – 20%
- Dividends – 7.5%
- Rents from property – 20%
No higher tax rates are applied, no matter how much income is received. However, if and when income is passed to any beneficiary, it may be subject to tax at higher rates – or the beneficiary may be able to claim repayment of some of the tax paid. For more information see our section for beneficiaries.
Where there is an income tax liability, then the responsibility for dealing with the tax affairs of the estate lies with the executor or personal representative.
The executor or personal representative may have to complete a tax return for the period after the date of death if the tax position of the estate is complex or if the tax liability is significant – this will not be a personal tax return, but a trust and estate tax return. An estate which is not regarded as “complex” can be dealt with informally.
You can find out more about trust and estate tax returns and informal procedures on the GOV.UK website.
Please note that under an 'interim arrangement', at least for the tax years 2016/17 to 2018/19, executors and personal representatives dealing with estates in administration do not need to report income, pay tax or otherwise do anything for HMRC whatsoever where:
- the only source of income is savings interest; and
- the tax liability is below £100.
If you need help, you can call HMRC's helpline for bereavement and deceased estates. You can find the details on the GOV.UK website.
There is more information on the records the personal representative will need to keep for the trust and estate tax return on the GOV.UK website and about how to pay any income tax liability on the GOV.UK website.
You can use the bereavement tool on the HMRC website to find out whether you have to complete a trust and estate tax return for the period of administration.
As alluded to above, sometimes the income arising during the administration period, can be distributed to a beneficiary, for example, where they are entitled to the underlying assets under the terms of the will or intestacy. For more information on the duties of an executor or personal representative when they distribute income to a beneficiary, visit the section ‘what if I am an executor or personal representative?’.
What about ISA income in the period of administration?
From 6 April 2018, when a person dies, their ISA will become a ‘continuing account of the deceased investor’ or ‘continuing ISA’. This means it will continue to enjoy tax advantages (that is, the income will be tax-free), until the earlier of:-
- The completion of the administration of the ISA holder’s estate
- The closure of the ISA, or
- three years after the ISA holder’s death.
Tell me about the estate and capital gains tax
If the deceased owned chargeable capital assets at the date of death, there is no CGT charged on any increase in the value of their assets up to the date of their death. The person receiving the asset from their estate (the beneficiary) is treated as if they had paid the market value at the date of death.
During the period of administration, CGT applies to gains on any assets disposed of by the estate. Executors or personal representatives might need to do this to release money to pay any debts, for example. Any gains arising on the disposal of any assets are calculated by reference to the sales proceeds less the value at death.
The full amount of the annual exemption is allowed to executors or personal representatives for the period from the date of death to the following 5 April (no matter how short this period is).
To the extent the administration period continues into the next two tax years, the personal representatives will also receive the full amount of the annual exemption in each of the following two tax years. If the administration period lasts longer than this, there is no further annual exempt amount available.
If the estate disposes of a chargeable asset and there is a gain, the personal representative will be responsible for paying the CGT out of the estate. They may have to complete a tax return for the estate if there is a significant amount of CGT due. This will not be a personal tax return, but a trust and estate tax return. You can find out more about trust and estate tax returns on the GOV.UK website.
The rate of tax on any chargeable capital gains on disposals by the estate of residential property from 6 April 2016 onwards is 28%.
The rate of tax on any chargeable capital gains on disposals by the estate of chargeable assets other than residential property from 6 April 2016 onwards is 20%.
There is more information on the GOV.UK website about the records the personal representative will need for the trust and estate tax return and about how to pay any CGT liability elsewhere on the GOV.UK website.
There is more information on CGT in our section ‘capital gains tax’.
Where can I find more help and information?
You can find the paper estate and trust tax return on GOV.UK.
Note, you cannot use HMRC’s free online services tax return software to complete and submit this tax return online.
If the deceased held NS&I investments at the date of death, you may find this NS&I booklet ‘Guidance after a bereavement’ useful.
In dealing with taxes for an estate, a personal representative may well find it advisable to seek professional help from a:
- solicitor – you can find a solicitor on the Law Society website;
- tax adviser – you can find an adviser on the Chartered Institute of Taxation website; or
- trust and estate practitioner – you can find a practitioner on the Society of Trust and Estate Practitioners website.
There are different sources of help if you need a solicitor in Scotland – you can find a solicitor on the Law Society of Scotland website, or a solicitor in Northern Ireland – you can use the Law Society of Northern Ireland website.