Learning Outcomes
After reading this article, you will be able to identify and apply the core rules on Income Tax and Capital Gains Tax (CGT) that apply during the administration of a deceased person’s estate. You will understand the responsibilities of personal representatives (PRs) for tax compliance, the calculation of tax on estate income and asset disposals, and the main reporting requirements and deadlines. You will also be able to spot common pitfalls and answer SQE1-style MCQs on this topic.
SQE1 Syllabus
For SQE1, you are required to understand the tax compliance and reporting obligations of personal representatives during estate administration. Focus your revision on:
- the scope of Income Tax and CGT during the administration period
- how PRs calculate and pay Income Tax on estate income and CGT on asset disposals
- the annual exemptions and tax rates that apply to estates
- the main reporting requirements and deadlines for PRs
- the transition of tax liability from the estate to beneficiaries
- practical compliance steps and common errors
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.
- Who is responsible for paying Income Tax and Capital Gains Tax on income and gains arising during the administration period of a deceased’s estate?
- What is the annual exempt amount for CGT available to personal representatives, and for how long can it be claimed?
- When must CGT on the sale of UK residential property by PRs be reported and paid?
- True or false? The estate is entitled to a personal allowance for Income Tax during administration.
Introduction
When a person dies, their personal representatives (PRs) must collect in the assets, pay debts and liabilities, and distribute the estate to those entitled. A key part of this process is ensuring that all tax liabilities arising during the administration period are correctly calculated, reported, and paid. This article explains the main rules on Income Tax and Capital Gains Tax (CGT) during estate administration, focusing on the compliance and reporting duties of PRs.
Income Tax during Estate Administration
The Administration Period
The administration period starts on the day after death and ends when the estate is fully administered. During this time, the PRs are responsible for all tax on income arising from estate assets.
Key Term: personal representatives (PRs) The persons (executors or administrators) legally responsible for managing the estate of a deceased person until it is distributed.
Income Tax Liability
PRs must pay Income Tax on all income generated by estate assets during the administration period. This includes interest, dividends, rent, and trading income. The estate is not entitled to a personal allowance, so all income is taxable.
Key Term: administration period The period from the day after death until the estate is fully distributed, during which PRs manage the estate and are responsible for tax compliance.
Tax Rates and Allowances
- Interest and rent: Taxed at the basic rate (currently 20%).
- Dividends: Taxed at the dividend ordinary rate (currently 8.75%).
- No personal allowance: Estates do not benefit from the personal allowance available to individuals.
- No savings or dividend allowances: These do not apply to estates.
Reporting and Payment
PRs must register the estate with HMRC if the estate’s income exceeds £10,000, if CGT is due, or if the estate is “complex” (e.g., high value or many beneficiaries). PRs may use the informal payment procedure for small, simple estates, but otherwise must file an estate tax return (Form SA900).
Income Tax must be paid by 31 January following the end of the tax year in which the income arose. Failure to pay on time results in interest and penalties.
Distributions to Beneficiaries
When PRs pay income to beneficiaries, they must provide a statement (Form R185) showing the gross income and tax paid. Beneficiaries include the income on their own tax return and may claim a refund if their own tax rate is lower.
End of Administration
Once the estate is fully administered, tax liability on future income passes to the beneficiaries, who are then responsible for their own tax compliance.
Capital Gains Tax during Estate Administration
CGT Liability
PRs are liable for CGT on gains made from the disposal of estate assets during the administration period. The gain is calculated as the difference between the sale proceeds and the probate value (value at date of death), less allowable costs.
Key Term: probate value The value of an asset at the date of death, used as the acquisition cost for CGT purposes during estate administration.
Annual Exempt Amount
PRs are entitled to the same annual exempt amount as individuals (£6,000 for 2023/24), but only for the tax year of death and the following two tax years. After that, no exemption applies.
Tax Rates
- Residential property: Gains taxed at 28%.
- Other assets: Gains taxed at 20%.
Reporting and Payment (CGT)
- UK residential property: CGT must be reported and paid within 60 days of completion using HMRC’s online service.
- Other assets: Gains are reported in the estate’s tax return (SA900), with payment due by 31 January after the end of the tax year.
Distributions of Assets
If PRs transfer assets to beneficiaries instead of selling them, there is generally no CGT charge at that point. The beneficiary acquires the asset at the probate value.
Beneficiaries’ CGT
If a beneficiary later disposes of an inherited asset, their gain is calculated using the probate value as their acquisition cost.
Compliance and Reporting Requirements
Record-Keeping
PRs must keep detailed records of all income, expenses, asset sales, and valuations. This is essential for accurate tax returns and to answer any HMRC queries.
Deadlines
- Income Tax: 31 January after the end of the tax year.
- CGT on UK residential property: 60 days from completion.
- CGT on other assets: 31 January after the end of the tax year.
Common Pitfalls
- Failing to report income or gains on time.
- Missing the 60-day CGT deadline for residential property.
- Distributing all assets before tax is settled.
- Not retaining enough funds to pay tax liabilities.
Worked Example 1.1
Scenario: PRs sell a residential property from the estate for £500,000. The probate value was £450,000. Selling costs are £10,000.
Answer: Gain = £500,000 (sale) – £450,000 (probate value) – £10,000 (costs) = £40,000. Deduct the annual exempt amount (£6,000) if available. Tax is due on £34,000 at 28% = £9,520. Must be reported and paid within 60 days of completion.
Worked Example 1.2
Scenario: PRs receive £8,000 interest and £4,000 dividends during administration. What tax is due?
Answer: Interest: £8,000 × 20% = £1,600. Dividends: £4,000 × 8.75% = £350. Total tax due: £1,950. No personal allowance applies.
Exam Warning
For SQE1, remember that PRs must pay CGT on asset disposals during administration, but beneficiaries are only liable for CGT on gains after they receive the asset. Watch for questions testing who is liable for tax at each stage.
Revision Tip
Always check the latest annual exempt amount and tax rates for the relevant tax year in the exam. HMRC updates these figures regularly.
Key Point Checklist
This article has covered the following key knowledge points:
- PRs are responsible for Income Tax and CGT compliance during the administration period.
- The estate pays Income Tax on all income received; no personal allowance applies.
- PRs must report and pay CGT on gains from asset disposals, using the probate value as the acquisition cost.
- PRs are entitled to the annual CGT exemption for the year of death and the next two years.
- CGT on UK residential property must be reported and paid within 60 days of completion.
- PRs must keep accurate records and file tax returns by the correct deadlines.
- Tax liability on future income and gains passes to beneficiaries once assets are distributed.
Key Terms and Concepts
- personal representatives (PRs)
- administration period
- probate value
