Learning Outcomes
After studying this article, you will be able to explain how income and capital gains tax apply during the administration period of an estate. You will know the main income tax and CGT responsibilities of personal representatives, determine liability periods, identify when tax returns are required, and advise on reporting and payment for income and gains earned by estates before and after death. You will also understand practical compliance issues common to SQE2 scenarios.
SQE2 Syllabus
For SQE2, you are required to understand the practical application of income tax and capital gains tax in wills and the administration of estates. This article addresses the following syllabus points:
- The duties and responsibilities of personal representatives in relation to income and capital gains tax during the administration of estates
- The identification and calculation of taxable income and gains arising before and during the administration period
- Reporting obligations and procedures for tax liabilities arising in administration
- The effect of distribution and completion of administration on tax liability and compliance
These areas are essential for advising clients and accurately applying tax law in practical SQE2 tasks relating to estate administration.
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 arising during the administration period of a deceased person’s estate?
- When does the administration period begin and end for income and capital gains tax purposes?
- Do personal representatives always have to file tax returns for an estate, and if not, when might formal returns be required?
- What tax treatment applies to income and gains received up to the date of death versus income and gains earned after death by an estate in administration?
Introduction
Taxation is a key obligation for personal representatives when handling a deceased's estate. The period between death and distribution (the administration period) can give rise to both income tax and capital gains tax (CGT) liabilities. This section covers the main principles, the duties of personal representatives (PRs), and common assessment points relevant to SQE2 scenarios.
The Role of Personal Representatives and Tax
PRs must identify, report, and settle tax liabilities arising from income and gains during administration. This includes income and gains due but unpaid before death, as well as all receipts generated or realised after death until administration completes.
Key Term: personal representative
The person(s) responsible for administering a deceased person's estate. This includes executors (named in the will) and administrators (appointed under intestacy rules).
Key Tax Periods
The administration period for tax purposes starts immediately after the date of death and ends when PRs have paid debts, settled legacies, and are in a position to distribute residue (completion of administration).
Income Tax During Administration
Income Arising Before Death
Income accrued up to the date of death is taxed as the deceased’s income for the tax year of death. PRs must declare and settle any outstanding income tax, using the deceased's allowances and tax rates for that year.
Income Arising After Death
Income received by the PRs after death is taxed as estate income. PRs are liable at basic rates for each source of income (dividends, bank interest, rental income) unless special rates apply.
Key Term: administration period
The interval from death until the completion of estate administration, when PRs have paid debts and can distribute to beneficiaries.
Capital Gains Tax During Administration
Gains Before Death
Where the deceased made disposals before death, any chargeable capital gains or losses must be finalised in the self-assessment tax return for the year of death.
Gains After Death
PRs are responsible for returns on gains made from date of death until the assets are distributed. PRs benefit from a reduced annual exempt amount for CGT for the year of death and the next two tax years.
Key Term: capital gains tax
Tax on the increase in value realised when PRs sell or dispose of estate assets over and above their value at death.
Tax Responsibilities and Returns
In many cases, PRs will only need to report via informal procedures if the estate is not “complex” or the tax due is modest. A “complex” estate generally arises if:
- The estate’s value exceeds £2.5 million, or
- Tax due for the administration period exceeds £10,000, or
- Asset sale proceeds exceed £500,000 in a tax year (for deaths after April 2016).
Where these limits are exceeded, or if requested by HMRC, PRs may need to file formal self-assessment tax returns for income and capital gains.
Key Term: informal payment procedure
A simplified method for reporting and paying income tax and CGT on simple estates, avoiding a full self-assessment tax return.
PRs must keep accurate records and pay any tax due before final distribution. Outstanding tax risks personal liability for PRs and can delay closing the estate.
Worked Example 1.1
A PR collects rental income and interest on bank deposits after death but before distributing residue. The estate is valued at £550,000, with income under £5,000 per annum and modest capital sales.
What are the PR's tax obligations?
Answer:
The PR must pay income tax at basic rates on post-death rental and bank interest. If total receipts and gains are within reporting thresholds, the informal payment arrangement may be used. PRs should keep records, settle liability, and document payment.
Worked Example 1.2
During the administration period, PRs sell estate shares for a gain of £18,000 above probate value in the second year after death. The estate has made no other disposals and is still in administration.
Is a tax return required, and how is CGT calculated?
Answer:
PRs are entitled to one-half of the individual annual CGT exemption. Basic rate CGT applies above the exemption. If sales exceed the reporting threshold in any single tax year, a self-assessment return must be filed. If not, payment can be made informally.
Exam Warning
PRs must only declare post-death income as estate income—not beneficiaries' or PRs' own income. Failing to settle estate tax before completing administration may result in personal liability to HMRC.
Practical Points: Final Distribution and Beneficiaries
Once administration is complete, PRs must provide estate income statements (Form R185) to beneficiaries entitled to income distributions. Beneficiaries may need to pay additional tax on distributions, depending on individual circumstances and tax rates.
Any outstanding tax should be paid and receipts obtained before transferring assets to beneficiaries.
Key Point Checklist
This article has covered the following key knowledge points:
- The administration period gives rise to distinct income tax and CGT obligations for personal representatives (PRs).
- PRs must account for and settle tax on income/gains arising during administration before distributing the estate.
- Informal reporting may be used for simple estates with low tax due; complex estates usually require full tax returns.
- Capital gains realised on asset sales after death are computed using the value at death as base cost.
- Failure to pay due tax can result in personal liability for PRs and may delay distribution.
Key Terms and Concepts
- personal representative
- administration period
- capital gains tax
- informal payment procedure