Administration: Post-Grant - Income Tax and CGT

Question 1

what are the PRs’ 2 different responsibilities re income tax and CGT?

Answer 1

1) finalise IT and CGT of the deceased before he died - pay outstanding amount owed on date of death or get a refund owed to the estate

2) pay IT and CGT that becomes due during the administration period

PRs must differentiate between deceased’s vs estate’s income and gains because different rates and reliefs apply

Question 2

what is the obligation on PRs to notify HMRC regarding the deceased’s income and gains as at the date of death?

Answer 2

tax on deceased’s income and gains is an estate expense, deducted from calculation of IHT (and refunds are an asset included in IHT)

SO: PRs must record this info and notify HMRC by submitting a TAX RETURN on behalf of the deceased for the period of 6 APRIL TO DATE OF DEATH

Question 3

deceased’s income and income tax

what type of income must be considered?
can D’s tax free allowance be used?

Answer 3

Income considered =

• untaxed income already due and paid to the deceased before death
• untaxed income paid to deceased after death which relates to a period before death (rent on properties due before death, final dividends declared before death)
• bank interest = any interest paid before death is taxed as the deceased’s income (but any interest paid after death is taxed as the estate’s income even if it relates to a period before death)

PRs can use the deceased’s tax free allowance

PRs must pay tax rates that apply to the deceased before his death

Question 4

how is interest received on D’s bank accounts treated for income tax purposes?

Answer 4

no date apportionment is needed:

• bank interest paid before death is taxed as deceased
• bank interest paid after death is treated as estate income and taxed at the PR’s (even if it relates to a period before death)

Question 5

deceased’s gains and CGT

what gains must be considered?
can D’s tax free allowance be used?

Answer 5

PRs must only pay CGT that the deceased was supposed to pay before death but did not

PRs can use deceased’s tax-free allowances

PRs must pay tax at the rates applicable to the deceased

Question 6

if an asset increased in value during D’s lifetime and was still owed by D at the date of death, should PRs pay CGT on the gain made by the estate?

Answer 6

NO

death is NOT a disposal for CGT purposes

Any asset that increased in value during the deceased’s lifetime but is still owned at date of death does not give rise to CGT because the value of the asset is ‘up-lifted’ to date of death value

Question 7

estate income - income tax

when must PRs pay income tax from the estate?
at what rate is income tax paid from the estate?
can the tax-free allowance be claimed?

Answer 7

PRs must pay IT if estate generates income during administration from date of death until date of distribution/sale - eg, bank interest after death, rent on properties due after death, etc.

income tax is paid at the BASIC rate (depending on type of income)

NO income tax personal allowance can be claimed

Question 8

if an asset generates income after it has been distributed to a beneficiary, who pays income tax on it?

Answer 8

the beneficiary - not the estate

Question 9

estate gains - CGT

when must PRs pay CGT on gains made by the estate?
can the tax-free allowance be claimed?
can the estate off-set losses against gains for CGT purposes?

Answer 9

PRs are liable to pay CGT if they make a sale or disposal of an estate asset during administration and the asset has increased in value since the date of death

PRs claim tax free allowance (like individuals) and pay tax on anything above that

PRs can offset losses (if assets fell in value since date of death) against gains made by disposing during the administration

note: gains made on chattels worth 6000 or less = exempt from CGT

Question 10

what are estates assets valued at?

Answer 10

the probate value = full market value of the asset on date of death

assets are uplifted in value on date of death - so no CGT is payable on any increase in value during the deceased’s lifetime which are still owned at date of death

Question 11

if PRs sell chattel as part of the administration, will CGT be payable by the estate if the chattel has risen in value since date of death?

Answer 11

no - a gain made on the disposal of a tangible moveable asset is exempt from CGT if the disposal is for a consideration of £6,000 or less

Question 12

when can annual personal allowance (IT) and tax free allowance (CGT) be claimed by PRs?

Answer 12

IT for deceased income = can use deceased’s personal allowance + pay at the deceased’s rate re type of asset
/
IT for estate = cannot use personal allowance + pay at basic rate
/
CGT for deceased = can use deceased’s tax-free allowance + pay at deceased’s rate
/
CGT for estate =
- can use tax-free allowance
- can offset against losses made during administration
- no CGT payable on gains of chattel sale worth 6,000 or less
- no CGT payable if asset transferred directly to B to satisfy beneficial entitlement

Question 13

if PRs distribute a non-cash asset to a beneficiary in satisfaction of their entitlement, at what value does the beneficiary acquire the asset?

does the estate pay CGT if the value of the asset increased from date of death to date of transfer?

Answer 13

Bs acquire assets at probate value on date of death - NOT the value of the asset at the date of transfer

the distribution to B will not be a disposal for CGT purposes

so the estate does not pay CGT if the asset increased in value from date of death to date of transfer

Question 14

selling an asset vs transferring asset to B to fulfil their entitlement

considerations and advantages and tax efficiency

Answer 14

considerations =

1) selling an asset during administration = CGT is taxed on gains

2) transfer asset directly to B = not a disposal so no CGT is payable by PRs and Bs acquire asset at probate value (date of death value)

tax efficiency =

1) better to sell =

• if B has no tax-free allowance left or would otherwise pay a higher rate - so better for PRs to sell the asset and use the estate’s tax free allowance and then distribute the cash to beneficiaries
• asset depreciates in value so PRs can offset if gains are made during administration

2) better to transfer to B =

• if PRs have no tax-free allowance left but B has - better to transfer asset to B and B to sell it and make the gain so B uses the tax-free allowance
• asset depreciates in value since date of death and B has gains - so Bs can sell the asset at a loss and offset it against his gains
• PRs cannot claim main residence relief but Bs can - so better to transfer to B and for B to sell if B has main residence relief