The period following the death of a family member is extremely difficult for many reasons but when you also act as an executor for the estate, managing the obligations of the role and navigating the lengthy process of obtaining Confirmation can be particularly stressful.

Often, where the Will only appoints non-professional executors, these executors will engage a law firm to apply for Confirmation and administer the assets of the estate on their behalf. Although the executors will remain personally liable for any errors or losses to the estate, that risk will be significantly reduced by taking legal advice. The reason for this is twofold – firstly, the executor is seen to be taking reasonable precautions to ensure that they fulfil their role and comply with their obligations and secondly the legal advice should flag up any legal risks or potential omissions.

However, it is very important that executors also understand the tax obligations of the estate and although many law firms will provide some guidance in respect of tax, not many have the expertise to ensure that not only all obligations are met, but also that all opportunities are considered.

Obligations

Tax liabilities to date of death:

For estates where the deceased was not in self-assessment, HMRC will often produce a simple assessment which may include a refund of tax. It should be noted that life assurance policies which cease on the death of the deceased may give rise to income tax charges and this information may not be available to HMRC unless disclosed in a final tax return.

Where the deceased was within the self-assessment system, a final paper tax return is usually filed by the executor (independently or through a tax agent). If the deceased had a tax agent in their lifetime, their authority ceases on death, and the executor will need to re-engage the tax agent directly and notify HMRC of their authority (either by way of a P1000 or a form 64-8).

Estate income and capital gains tax obligations:

An estate will not require to notify HMRC of income or pay tax if the income accruing in the period of administration is £500 or less per tax year.

An estate will be a ‘simple estate’ for tax purposes when all of the following conditions are met:

  • the value of the estate is under £2.5m in total,
  • under £500k of assets have been sold in any tax year and
  • the total income tax and capital gains tax liability for the administration period is less than £10k.

A simple estate does not have to submit a formal tax return to HMRC, the executor (or an appointed tax agent) can simply submit a letter detailing all income and gains in the administration period, calculate and pay the relevant tax.

If the estate breaches any of the three criteria above then it is considered a ‘complex estate’ and a tax return will need to be submitted to HMRC for each tax year of the period of administration. Complex estates also must be registered on the TRS (HMRC’s trust registration service).

There is no de-minimis exemption for capital gains tax but in the tax year of death and the following two tax years, the executors can claim the ‘Annual Exempt Amount’ of £3,000 per year against any gains. It should also be remembered that the 60-day reporting obligations for residential property are not superseded by either the simple or complex estate procedures – that is to say that the 60-day reporting is required regardless of whether the estate is simple or complex.

Opportunities

The estate period is a particularly flexible period when it comes to income tax and capital gains tax. For instance, assets can be appropriated tor residuary beneficiaries under the Will in order to direct income to those individuals (where the Will allows this and interim distributions can safely be made). Likewise capital assets can be appropriated to beneficiaries prior to their sale if this is advantageous from a tax perspective. Where UK or Offshore bonds (that continue after the death of the deceased) form part of the estate, assignation of those bonds to beneficiaries can significantly reduce the income tax burden applicable on surrender.

Losses on capital assets, within certain time periods, can be used to reduce IHT, rather than create capital losses by substituting sale proceeds for date of death valuations. As IHT is charged at a higher rate than CGT this can be very tax efficient.

Finally, there is always scope within two years of death for deeds of variation and variations of will trusts. These options can result in great IHT savings for older individual beneficiaries who can choose to let assets by-pass them and devolve to their children, without having to make gifts that would then have to be survived by seven years to be effective.

An estate is often like a jigsaw puzzle. Usually lawyers, brokers and tax advisors are working together to ensure all the pieces are picked up and slotted into the correct place so that all parties can be assured that nothing has been missed. It can be very easy for the puzzle to be incomplete without the assistance of a competent tax advisor, preferably a STEP qualified practitioner who is trained in both the legal aspects of the administration of an estate and the tax aspects, as they tend to be able to identify the cracks through which puzzle pieces often fall.

CT’s personal tax team, including our STEP qualified staff, are happy to have a conversation with any executor looking for advice and support.

Please get in touch.