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.
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. All the assets and debts belong to the estate.
If the value of the estate exceeds the nil rate band and residence nil rate band, if applicable, inheritance tax (IHT) will be payable. 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.
When all taxes have been paid, the executor or personal representative is free to distribute the estate to the beneficiaries, for whom no tax liability arises on receipt of their legacies. It is advisable to notify HMRC that the period of administration has ended.
Tell me about the estate and inheritance tax
It is the responsibility of the executor or personal representative to assess the estate, complete the appropriate IHT forms and pay any IHT due.
The first step is to value the estate to determine whether IHT is due or not. The personal representative can then decide which route to follow.
Where IHT is due, dealing with that will be one priority for the personal representative, because probate will not be granted until the IHT has been paid or arrangements made with HM Revenue & Customs (HMRC) for payments over a period of up to 10 years.
For more information on the personal representative’s responsibilities with regards to IHT, visit the sections ‘how do I assess an estate for inheritance tax purposes?’ and ‘how do I work out the inheritance tax due on an estate?’.
Tell me about the estate and income tax
During the period of administration, income tax applies to income that the estate receives.
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. 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. 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%
Where there is an income tax liability, then the responsibility for dealing with the tax affairs of the estate lies with the executor or in the case of someone dying intestate (intestate means that the person died without having written a valid will), with the administrator (executor in Scotland).
The personal representative will deal either with the tax office of the deceased or the tax office of the first-named personal representative. The executor 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 return and informal procedures on the GOV.UK website. It also states that under 'interim arrangment', at least for the tax years 2016/17 to 2018/19, personal representatives dealing with estates in administration do not need to report income and pay tax where:
- the only source of income is savings interest; and
- the tax liability is below £100.
If you need help, you can also call HMRC's helpline for bereavement and deceased estates. You can find the details on the GOV.UK website.
You can use the bereavement guide questionnaire on the HMRC website to find out whether you have to complete a trust and estate tax return for the period of administration.
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 is treated as if they had paid the market value at the date of their death.
During the period of administration CGT applies to gains on assets disposed of by the estate. The full amount of the annual exemption is allowed to 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 them, 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. Where there is a CGT liability, then the personal representative will deal either with the tax office of the deceased or the tax office of the first-named personal representative. 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 CGT in our section ‘capital gains tax’.
Where can I find more help and information?
For more information on the duties of an executor or personal representative, visit the section ‘what if I am an executor or personal representative?’.
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?’.
There is more information on working out rental profits in our section ‘property income’.
There is more information on CGT in our section ‘capital gains tax’.
You can also find more information on the GOV.UK website about dealing with a tax return for someone who has died.