Taxation in wills and administration - Income and Capital Ga...

Learning Outcomes

This article covers income and capital gains tax during estate administration, including:

• The distinction between the deceased’s pre‑death income and post‑death estate income, and who bears liability
• The duties of personal representatives to identify, report, and settle income tax and CGT during the administration period
• The start and end of the administration period for tax purposes and how timing affects tax treatment
• When formal SA900 returns are required versus using HMRC’s informal payment procedure, including estate registration and UTR
• Issuing Form R185 (Estate Income) to beneficiaries and how beneficiaries use the information in their own tax returns
• CGT computation for PRs using probate value, availability of the PR annual exempt amount, and applicable trustee rates
• The 60‑day UK residential property CGT reporting obligation in addition to any SA900 filings
• How appropriation decisions—particularly to charities—impact CGT and practical compliance in 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, with a focus on 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.

1. Who is responsible for paying income tax and capital gains tax arising during the administration period of a deceased person’s estate?
2. When does the administration period begin and end for income and capital gains tax purposes?
3. Do personal representatives always have to file tax returns for an estate, and if not, when might formal returns be required?
4. 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, with emphasis on practical compliance (informal payments vs self‑assessment), allocating estate income to beneficiaries (Form R185), and CGT planning during administration.

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).

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. PRs act as a single continuing body for tax purposes, separate from the beneficiaries, and are expected to keep accurate records that distinguish pre‑ and post‑death amounts.

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). In practice, completion aligns with the date on which residue is ascertained for distribution.

Key Term: administration period
The interval from death until the completion of estate administration, when PRs have paid debts and can distribute to beneficiaries or trustees of any continuing will trusts.

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. The Apportionment Act 1870 does not apply for income tax purposes: the key test is whether the receipt was “due” pre‑death (e.g., a dividend with a payable date before death belongs in the deceased’s final return even if received after death).

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 (for example, bank interest and rental income) and at the ordinary dividend rate for dividends; personal allowances and individual savings/dividend allowances do not apply to estates. Income tax is therefore due even if the value of estate income would be within an individual’s personal allowance.

Common income sources include:

• Savings interest and bond coupons
• Dividends on shares held within the estate
• Rental income from let property
• Continuing pension payments receivable by the estate (rare; many pensions pay lump sums outside the estate)

Certain receipts remain tax‑exempt post‑death. For example, ISA investments retain their tax advantages during administration for a limited period (currently up to three years from death or until closure, if earlier), so interest/dividends arising within the ISA are not taxed during that period.

Allowable deductions from estate income are tightly limited. General administration and legal expenses are not deductible for income tax. However, interest on a specific loan obtained solely to pay inheritance tax on personalty vesting in the PRs may be deductible for up to one year.

Exam Warning

Estate income is taxed on the PRs. Beneficiaries do not include pre‑distribution estate income on their returns unless and until they receive estate income distributions accompanied by Form R185 (Estate Income). Always separate the deceased’s pre‑death income from post‑death estate income.

Key Term: probate value
The market value of an estate asset at the date of death, used for IHT and (normally) as the CGT acquisition cost for PRs and 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. Losses in the tax year of death can be carried back against gains in the three preceding tax years (taking later years first).

Gains After Death

PRs are responsible for returns on gains made from date of death until the assets are distributed. Death is not a disposal for CGT. PRs are deemed to acquire estate assets at their probate value. When PRs sell assets for more than probate value, CGT is due on the gain; when sold for less, a capital loss may arise.

PRs benefit from the annual exempt amount for the year of death and the next two tax years. Thereafter, estates have no annual exemption. PR CGT rates mirror trustee rates: gains are charged at the trustee rate for general assets and at the higher residential property rate for UK residential property disposals.

The IHT value “ascertained” for IHT generally fixes the CGT base cost. If no IHT value was ascertained (for example, fully spouse‑exempt estates), PRs must establish market value at death for CGT purposes.

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.

Two important CGT points during administration:

• Distributions of assets to beneficiaries are not disposals by PRs for CGT. Beneficiaries are deemed to acquire at probate value and compute any later gains by reference to that base.
• Appropriations to charities are treated on a no gain/no loss basis, and subsequent charity disposals are exempt from CGT. Appropriation to a non‑charity beneficiary is not a disposal; any later sale by that beneficiary is computed using probate value.

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 probate value exceeds £2.5 million, or
• Income tax plus CGT 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 returns (form SA900) for each tax year of the administration period. HMRC may allow informal payment for simple estates: PRs send a single calculation covering all income and gains for the whole administration period and make one composite payment. If circumstances later indicate the estate is complex, PRs must register the estate with HMRC to obtain a UTR and file SA900 returns for relevant years; any informal payments are credited against the SA account.

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.

Compliance specifics you must know

• Self‑assessment deadlines: if SA900 returns are required, estate returns follow self‑assessment filing/payment deadlines (usually 31 January following the tax year).
• 60‑day UK property CGT reporting: when PRs dispose of UK residential property at a gain, a separate UK property CGT return and payment are due within 60 days of completion, in addition to including the disposal on SA900 if required.
• R185 statements: when PRs distribute estate income (not capital) to beneficiaries after completion, they must provide Form R185 (Estate Income), showing the gross income by category and tax deducted/paid by the PRs. Beneficiaries use R185 figures in their own returns and may be liable for additional tax depending on their rates and allowances.
• Post‑mortem relief interactions: if PRs have claimed IHT relief on a fall in value of quoted shares or land between death and sale, the revised IHT value becomes the CGT base cost.

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, and at the ordinary dividend rate on any dividends. 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. No personal allowances apply to the estate.

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 the annual CGT exemption for the year of death and the next two tax years. CGT applies at trustee rates above the exemption. If the estate is not complex by the HMRC criteria and other disposals are minimal, payment can be made informally. If thresholds are exceeded or HMRC requires, SA900 returns must be filed for each tax year covering the administration period.

Worked Example 1.3

A company declared a dividend payable on 10 April. The shareholder died on 8 April. The dividend was received into the estate’s bank account on 15 April.

Is the dividend the deceased’s income or estate income?

Answer:
It depends on the dividend’s due date. As the dividend was due and payable after death (10 April is after the date of death), it is estate income taxable on the PRs. Had the payable date been before death, it would belong on the deceased’s final return even if received later.

Worked Example 1.4

PRs sell the deceased’s former UK residential investment property at a gain. Completion is on 30 June. The estate is otherwise simple.

What CGT reporting is required and by when?

Answer:
A UK property CGT return must be filed and CGT paid within 60 days of completion (by late August). The disposal may also need to be included in an SA900 if the estate is complex or if HMRC requires returns. The PRs can use the estate’s annual exemption if still within the first two tax years after death.

Worked Example 1.5

The will leaves shares to residue, and the residuary beneficiary is a charity. The PRs decide to appropriate the shares to the charity and ask the charity to instruct sale.

What is the CGT position?

Answer:
Appropriation to the charity is on a no gain/no loss basis, and the charity’s subsequent disposal is exempt from CGT. Where residue includes assets with built‑in gains, appropriation to a charity avoids a CGT charge in the PRs’ hands.

Worked Example 1.6

PRs plan two disposals: one small gain in the tax year of death and one larger gain in the following tax year. They ask whether timing affects CGT.

How should they plan disposals?

Answer:
PRs have the annual exemption for the year of death and the next two tax years only. Phasing disposals across those years can utilise exemptions more efficiently. After that period, no annual exemption is available to the estate, so timing within the first two tax years after death can reduce CGT.

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 add the income (retaining its original nature—interest, dividends, property income) to their own returns. Basic rate taxpayers may have no further liability; higher or additional rate taxpayers may have to pay more. Non‑taxpayers may reclaim some tax. Keep in mind:

• R185 applies to estate income distributions, not capital transfers of assets
• If residue is left to a will trust, later income is taxed under trust rules (not estate rules)
• If minors receive income via will trusts, s31 Trustee Act mechanisms apply; estate‑phase income remains the PRs’ liability until completion

Any outstanding tax should be paid and receipts obtained before transferring assets to beneficiaries. Appropriation decisions can be used to manage CGT (for example, to charities) and may be recorded in the estate accounts.

Key Term: R185 (Estate Income)
The certificate PRs issue to beneficiaries after completion, showing the estate income paid to them and tax treated as paid, which beneficiaries use in their own tax returns.

Additional detail on pre‑ and post‑death distinctions

• Bank interest: If interest accrues daily and is credited after death, only the daily portion up to death belongs to the deceased; the rest is estate income. For tax, the due date of credit/entitlement is decisive.
• Rent: Rent due before death (per lease terms) belongs to the deceased; rent falling due after death is estate income.
• ISAs: Post‑death ISA holdings retain their tax‑free status for a limited period; new subscriptions cannot be made by the PRs. Spouse/civil partner may have an Additional Permitted Subscription allowance based on the deceased’s ISA value at death.

CGT interactions you should spot

• Base cost: probate value generally (or revised IHT value if post‑mortem relief claimed)—do not reuse lifetime cost figures
• PR annual exemption: available for two tax years after the year of death; use it or lose it
• Appropriation to beneficiaries: not a disposal; later disposal is computed by the beneficiary using probate value
• Charity transfers: no gain/no loss on appropriation; charity disposal exempt
• Reporting: UK residential property gains must be reported within 60 days; other gains are reported via SA900 if required

Estate reporting: informal vs SA900

Informal payment is suitable only where the estate is not complex. PRs send HMRC a composite calculation at the end of administration summarising:

• Gross estate income by category
• Estate income tax paid at applicable rates
• Gains and losses by tax year, including use of PR annual exemptions
• UK property CGT payments already made within 60 days HMRC issues a payment reference for a single settlement. If during administration the estate crosses complexity thresholds or HMRC asks for returns, PRs must register the estate, obtain a UTR and submit SA900 returns for each tax year spanning the administration.

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. Do not overlook the 60‑day UK property CGT reporting duty; missing it triggers interest and penalties even if the estate would otherwise be dealt with informally.

Practical compliance checklist for PRs

• Separate the deceased’s final income and pre‑death liabilities from estate income/gains
• Identify whether ISA holdings retain tax advantages and for how long
• Check whether the estate is “complex” early; decide between informal payment and SA900
• Use the PR annual CGT exemption strategically within the permitted period
• Consider appropriations (especially to charities) to manage CGT
• Issue Form R185s promptly after completion for any income distributed
• File 60‑day UK property CGT returns for residential property gains
• Keep supporting valuations and evidence of due dates/payable dates for pre‑/post‑death allocations

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 (SA900).
• Capital gains realised on asset sales after death are computed using the value at death (probate value) as base cost.
• UK residential property gains by PRs must be reported and paid within 60 days of completion.
• Distributions of assets to beneficiaries are not CGT disposals by PRs; beneficiaries take probate value as acquisition cost.
• Form R185 must be issued for estate income distributions; beneficiaries then account for tax based on their circumstances.
• 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
• probate value
• R185 (Estate Income)