How does the personal representative deal with the income and capital gains arising after the deceased’s death?
This page explains how the personal representative (executor) deals with and reports any income and/or capital gains that arise after the deceased’s death but before the estate is distributed to beneficiaries. This period is called the period of administration. There are special rules that may apply if the personal representative is not resident in the UK and we do not cover them here.
This depends on the assets and liabilities in the estate and how quickly they can be identified and valued. Once all pre-death debts have been paid, funeral costs accounted for and any inheritance tax liability settled, HMRC regard the administration period to be over.
That means that the personal representative can transfer assets to the beneficiaries – but only in accordance with the Will or according to the laws of intestacy, where no Will was made. Also, in Scotland there are prior and legal rights to be considered. You can read more about this on GOV.UK.
Do all estates have to make reports of income to HMRC?
No, they do not. Where the only source of income is savings interest giving rise to a tax liability of less than £100, HMRC have agreed for the tax years 2016/17 to 2020/21 that no reporting of estate income is necessary. Also, income in a deceased’s personal ISA may be exempt from tax. See below.
From 6 April 2018, when a person dies, their ISA will become a continuing account of the deceased investor or a continuing ISA. This means it will continue to enjoy tax advantages (that is, the income will be tax free), until the earliest 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.
You can read more about some special rules applying to a deceased’s ISAs where they pass to a spouse or civil partner on our page Death of a spouse or civil partner.
The personal representative only needs to do this if any gains from disposals of estate assets exceed the capital gains tax exemption (£12,300 for 2020/21) or the estate sells or disposes of assets with a value greater than £49,200 (four times the annual exemption). Where the estate needs to use capital losses to stay within the capital gains tax exemption, the personal representative will have to report all the gains and losses, despite the fact no capital gains tax may be payable. See also below that the estate only benefits from the capital gains tax exemption for a few years.
How are the income and/or gains reported to HMRC?
As noted above, the responsibility for dealing with the tax affairs of the estate lies with the personal representative.
The 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. Most estates will use the informal procedures.
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.
You can find out more about trust and estate tax returns and informal procedures on GOV.UK.
What taxation is payable on the income arising during the period of administration?
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 personal representative 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 personal representative 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, for example winnings from premium bonds. See also the section on ISAs above).
From 6 April 2016 onwards, UK 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, subject to the exception above that if the only income received by the estate is savings income of less than £100 then no reporting may be necessary.
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 on 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 information for beneficiaries.
During the period of administration, capital gains tax (CGT) applies to gains on any assets disposed of by the estate except for assets transferred to the beneficiaries. You can read above on when any gains need to be reported to HMRC. Personal representatives might need to dispose of assets 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.
Personal representatives get a full personal annual capital gains exemption 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, no further annual exempt amount is 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 GOV.UK. You can read about when a tax return is needed as opposed to informal reporting of income and/or gains on GOV.UK.
The rate of tax on any chargeable capital gains on disposals by the estate of residential property, including any home of the deceased, is 28%. You need to also be aware that any sales of residential property on or after 6 April 2020 need to be reported to HMRC within 30 days of completion and any tax due needs to be paid within the same period. You can read more on GOV.UK.
The rate of tax on any chargeable capital gains on disposals by the estate of chargeable assets other than residential property is 20%.
There is more information on CGT in our capital gains tax page.
When assets are transferred, they are passed over at the value at date of death – unless it is cash (or more likely a bank account) where the actual sum is the value transferred.
For example, if a beneficiary receives £10,000 from an estate plus a small number of shares valued at £5,500 when they are transferred to them, the beneficiary needs to know the value of the shares at date of death. These will have been valued by the personal representative. It is the value at date of death that will become the ‘cost’ for the beneficiary when they dispose of them, not the value of £5,500 at the date of transfer to them.
What happens when income from the estate is paid to beneficiaries?
The personal representative must provide the beneficiary with a certificate, a form R185, that will show the income paid to the beneficiary during a specific tax year and the income tax already paid by the personal representative on that income. Depending on their income tax position, the beneficiary may be able to reclaim some of the tax paid, be due to pay more tax on the income or may have no further tax to pay as the correct amount has been paid already.
You can read more about the tax position of the beneficiary in relation to this income on our page Income from a trust or from the estate of a deceased person.
Where can I find more help and information?
You can find the paper estate and trust tax return that you can download and print on GOV.UK.
You cannot use HMRC’s free online services tax return software to complete and submit an estate tax return online, but software is available to purchase. Many agents will have software that enables the forms to be filed 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.
For further sources of information and support, see our separate page Getting help with bereavement and inheritance tax.
|◀ Dealing with the deceased's own tax affairs|