Executors of Estates could find themselves subject to a hidden tax liability resulting from income generated by the deceased’s investments.
Whilst Inheritance Tax is calculated with reference to the value of assets held at date of death, income received during the administration of an Estate remains taxable where the investments continue to produce a return.
The administration period, being the period from the day after a person’s death to the date the Executor finishes the distribution of the estate, can last at least a year on average if not longer for larger estates. During this time, the estate is taxed in its own right. There is a risk that Executors may not realise that the income accrued (dividends and gross interest) during this time will be subject to Income Tax reporting and payment obligations.
Since April 2018, individual investors have received a tax-free dividend allowance of £2,000 per year. Any income received above this threshold is taxed at 7% – 38% depending on a person’s total earnings.
However, Executors do not have the benefit of this allowance meaning that all dividends earned by an estate’s investments will be taxable. Further, the Executors will be held personally liable for tax due if they fail to account for dividends or other income on tax returns. Additionally, personal allowances are not available to the Executor after the deceased’s date of death to set off against post-death income.
Whilst HMRC have often agreed to let smaller Estate tax liabilities be settled informally by way of a letter giving appropriate details, this will not be the case for larger estates.
It is therefore important that Executors are aware of their responsibilities before agreeing to act, as they bear the responsibility for administering the Estate and ensuring that all tax liabilities are settled correctly. This includes:
- Preparing an Inheritance Tax return and paying Inheritance Tax due out of the deceased’s estate
- Accounting to HMRC for any Income Tax and Capital Gains Tax for the period of the administration of the Estate and reporting any previously reported income and gains that arose prior to the deceased’s death
- Settling all debts, both those outstanding before the date of death and those incurred as part of the administration of the Estate
Crucially, the liability for any financial loss resulting to the Estate lies with the Executors personally, even when arising from genuine mistakes.
Executors, however, do not have to handle every aspect of the administration of the Estate themselves, and can appoint Solicitors and other professional advisors, such as Accountants and Financial Advisors, to assist with or advise on all, or any part, of the administration process.
Should any potential or acting Executors like to discuss the above or require any advice please contact a member of our Private Client team who will be happy to assist.