Income Tax and Capital Gains Tax during estate administration - Personal representatives' liability to Income Tax

Learning Outcomes

After studying this article, you will be able to explain when and how personal representatives are liable for Income Tax and Capital Gains Tax during estate administration. You will understand the main sources of taxable income and chargeable gains, the calculation and reporting of tax liabilities, and the statutory duties of personal representatives in relation to HMRC. You will also be able to apply these principles to SQE1-style scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the tax obligations of personal representatives during the administration of an estate. In your revision, focus on:

  • the liability of personal representatives for Income Tax on estate income arising during administration
  • the liability of personal representatives for Capital Gains Tax on disposals of estate assets
  • the calculation and reporting of tax liabilities for the estate
  • the distinction between the deceased’s pre-death tax affairs and the estate’s tax position during administration
  • the practical steps required to comply with tax obligations before distributing assets to beneficiaries

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. What types of income are personal representatives required to report and pay Income Tax on during estate administration?
  2. When does Capital Gains Tax arise for personal representatives, and how is the gain calculated?
  3. Are personal representatives entitled to a personal allowance when calculating Income Tax for the estate?
  4. What is the annual exempt amount for Capital Gains Tax, and how does it apply to estates?
  5. What are the main steps personal representatives must take to ensure compliance with HMRC before distributing the estate?

Introduction

When a person dies, their estate may continue to generate income and may also realise gains on the disposal of assets before distribution to beneficiaries. Personal representatives—executors or administrators—are legally responsible for managing the estate’s tax affairs during the administration period. This article explains the key rules on Income Tax and Capital Gains Tax liability for personal representatives, including calculation, reporting, and compliance requirements for the SQE1 exam.

Personal Representatives and Estate Taxation

Personal representatives must deal with all tax liabilities arising during the administration period. The estate is treated as a separate taxable entity for Income Tax and Capital Gains Tax purposes.

Key Term: personal representative
A person appointed to administer a deceased’s estate—either as executor (named in a will) or administrator (appointed under intestacy rules).

Key Term: administration period
The period between the date of death and the completion of the estate’s administration, during which the personal representatives manage the estate and settle all liabilities.

Income Tax Liability During Estate Administration

Taxable Income of the Estate

During the administration period, the estate may receive income from:

  • interest on bank or building society accounts
  • rental income from property
  • dividends from shares
  • business or trading income (if the deceased’s business continues temporarily)
  • other investment income

Personal representatives are responsible for reporting and paying Income Tax on all income arising during the administration period.

Key Term: estate income
Income received by the estate after the date of death and before completion of administration.

Tax Rates and Allowances

Income Tax on estate income is charged at the basic rate (currently 20%) for most types of income, and at the dividend ordinary rate (currently 7.5%) for dividends. Personal representatives do not receive a personal allowance for the estate.

Key Term: personal allowance
The amount of income an individual can receive each tax year without paying Income Tax. Estates do not benefit from a personal allowance.

Calculation and Reporting

Personal representatives must:

  • identify all sources of estate income
  • calculate the tax due at the correct rates
  • pay the tax to HMRC, usually by 31 January following the end of the tax year
  • provide beneficiaries with a statement of income and tax deducted if income is distributed

If the estate is small and the tax due is below HMRC’s threshold, an informal payment arrangement may be used. For larger or more complex estates, a self-assessment tax return is required.

Worked Example 1.1

Scenario:
An estate receives £1,200 interest from a savings account and £2,800 rental income during the administration period. What tax must the personal representatives pay?

Answer:
Interest: £1,200 × 20% = £240
Rental income: £2,800 × 20% = £560
Total Income Tax due: £240 + £560 = £800

Distribution to Beneficiaries

When income is paid to beneficiaries, it is treated as received net of tax. Beneficiaries may need to declare this income on their own tax returns and can claim a tax credit for the tax already paid by the estate.

Capital Gains Tax Liability During Estate Administration

Chargeable Gains

If personal representatives sell or otherwise dispose of estate assets (such as property, shares, or valuable chattels) during the administration period, Capital Gains Tax (CGT) may arise on any gain.

Key Term: chargeable gain
The profit made on the disposal of a chargeable asset, calculated as the difference between the sale proceeds and the acquisition cost (usually the market value at the date of death).

Calculation of Gains

For CGT purposes, the acquisition cost of an asset is its market value at the date of death. The gain is calculated as:

Sale proceeds – Value at date of death = Chargeable gain

Personal representatives are entitled to the annual exempt amount for CGT for the tax year of death and the following two tax years.

Key Term: annual exempt amount
The amount of chargeable gains an individual or estate can realise each tax year without paying CGT.

CGT Rates

CGT is charged at 20% for most assets and 28% for gains on residential property. The annual exempt amount for estates is currently £6,150 (half the individual allowance).

Worked Example 1.2

Scenario:
The estate includes a painting valued at £10,000 at death. The personal representatives sell it for £15,000 during administration. What is the CGT liability, assuming the annual exempt amount is £6,150?

Answer:
Gain: £15,000 – £10,000 = £5,000
As the gain is less than the annual exempt amount, no CGT is due.

Reporting and Payment

Personal representatives must report disposals and pay any CGT due by 31 January following the end of the tax year. For residential property, CGT must be reported and paid within 60 days of completion.

Duties and Compliance

Personal representatives must:

  • keep accurate records of all income and disposals
  • file tax returns and pay tax due before distributing the estate
  • provide beneficiaries with statements of income and tax paid

Failure to comply may result in personal liability for unpaid tax and possible penalties.

Worked Example 1.3

Scenario:
An estate receives £4,000 in dividends and £2,000 in interest. The personal representatives distribute £3,000 to a beneficiary. What information must they provide to the beneficiary?

Answer:
They must provide a statement showing the amount paid, the type of income, and the tax deducted (e.g., £3,000 net of tax at 7.5% for dividends or 20% for interest). The beneficiary can use this information to claim a tax credit on their own tax return.

Special Considerations

International Assets and Double Taxation

If the estate includes foreign assets, personal representatives must consider whether income or gains are also taxable abroad. Double taxation agreements may provide relief to avoid the same income or gain being taxed twice.

Anti-Avoidance

Personal representatives must avoid arrangements that could be challenged as tax avoidance. Transactions must be at arm’s length and comply with statutory requirements.

Key Point Checklist

This article has covered the following key knowledge points:

  • Personal representatives are responsible for Income Tax and Capital Gains Tax on estate income and gains during administration.
  • Estate income is taxed at basic rates, with no personal allowance for the estate.
  • Personal representatives are entitled to the annual exempt amount for CGT for the year of death and the next two years.
  • Accurate calculation, reporting, and payment of tax to HMRC is required before distributing the estate.
  • Beneficiaries must be provided with statements of income and tax paid on distributions.
  • Special rules apply for foreign assets and double taxation.
  • Personal representatives may be personally liable for unpaid tax if they fail to comply with their duties.

Key Terms and Concepts

  • personal representative
  • administration period
  • estate income
  • personal allowance
  • chargeable gain
  • annual exempt amount
The answers, solutions, explanations, and written content provided on this page represent PastPaperHero's interpretation of academic material and potential responses to given questions. These are not guaranteed to be the only correct or definitive answers or explanations. Alternative valid responses, interpretations, or approaches may exist. If you believe any content is incorrect, outdated, or could be improved, please get in touch with us and we will review and make necessary amendments if we deem it appropriate. As per our terms and conditions, PastPaperHero shall not be held liable or responsible for any consequences arising. This includes, but is not limited to, incorrect answers in assignments, exams, or any form of testing administered by educational institutions or examination boards, as well as any misunderstandings or misapplications of concepts explained in our written content. Users are responsible for verifying that the methods, procedures, and explanations presented align with those taught in their respective educational settings and with current academic standards. While we strive to provide high-quality, accurate, and up-to-date content, PastPaperHero does not guarantee the completeness or accuracy of our written explanations, nor any specific outcomes in academic understanding or testing, whether formal or informal.
No resources available.

Job & Test Prep on a Budget

Compare PastPaperHero's subscription offering to the wider market

PastPaperHero
Monthly Plan
$10
Assessment Day
One-time Fee
$20-39
Barbri SQE
One-time Fee
$3,800-6,900
BPP SQE
One-time Fee
$5,400-8,200
College of Legal P...
One-time Fee
$2,300-9,100
Job Test Prep
One-time Fee
$90-350
Law Training Centr...
One-time Fee
$500-6,200
QLTS SQE
One-time Fee
$2,500-3,800
University of Law...
One-time Fee
$6,200-22,400

Note the above prices are approximate and based on prices listed on the respective websites as of May 2025. Prices may vary based on location, currency exchange rates, and other factors.

Get unlimited access to thousands of practice questions, flashcards, and detailed explanations. Save over 90% compared to one-time courses while maintaining the flexibility to learn at your own pace.

All-in-one Learning Platform

Everything you need to master your assessments and job tests in one place

  • Comprehensive Content

    Access thousands of fully explained questions and cases across multiple subjects

  • Visual Learning

    Understand complex concepts with intuitive diagrams and flowcharts

  • Focused Practice

    Prepare for assessments with targeted practice materials and expert guidance

  • Personalized Learning

    Track your progress and focus on areas where you need improvement

  • Affordable Access

    Get quality educational resources at a fraction of traditional costs

Tell Us What You Think

Help us improve our resources by sharing your experience

Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

Saptarshi Chatterjee

Saptarshi Chatterjee

Senior Associate at Trilegal