IT / CGT During Administration of Estate Flashcards
What are the PRs responsibilities in regard to IT and CGT dueing administration?
- Finalise the deceased’s IT and CGT position for the tax year of death
- Pay IT and CGT that becomes due during administration period
This means the PRs are responsible for paying any taxes due on income or gains that arise during the administration
Expense of IT / CGT
- PRs are liable to pay any IT and CGT that the deceased owed at the date of their death
- Tax liabilities are an estate expense and are payable from estate assets
- These liabilities are deductible when valuing the taxable estate
Differentiate between deceased’s income/gains and the estate’s income/gains
What is the duty of PRs regarding the deceased’s income?
Deceased’s income:
- Utilise deceased’s tax-free allowances and pay tax at rates applicable to deceased
- Account for:
a) untaxed income paid before death
b) some income paid after death which relates to period before death (e.g., rent due or dividends declared but not paid)
- Bank interest paid after death is always taxed as estate income
What is the duty of PRs regarding the deceased’s gains?
- Calculate CGT liability for disposals made by the deceased before they died
- Utilise deceased’s tax free allowance and pay tax at rates applicable to the deceased
At what value do beneficiaries acquire assets upon the deceased’s death (for CGT purposes)?
Death is not a disposal for CGT purposes, which means that beneficiaries acquire assets at the market value at the date of the deceased’s death
- Death does not give rise to a CGT liability
What is the duty of PRs/beneficiaries regarding estate income?
Estate income (interest, dividends, rent) between date of death and date of distribution
- Paid at basic rate
- No tax-free allowance
- PRs give Form R185 to beneficiaries when estate income is distributed
- Beneficiaries can use this to claim refund or higher/additional rate tax payers must top it up
- Total income does not exceed £500 = no requirement to report to HMRC and no tax liability for any beneficiary
What is duty of PRs regarding estate gains?
Only post-death gains are chargeable. This means only if assets have increased in value since the date of death (gain when sold)
- Liable if they make a disposal of assets during administration period
- Can claim tax-free allowance
- Any losses can be off-set against any gains during administration
- Value of estate assets is based on their date of death value (not the value when the deceased acquired the asset)
- A gain on a disposal of a chattel is exempt if consideration of £6,000 of less
- CGT in the hands of PRs and payable from estate funds
Powers of PRs in relation to assets and tax efficiency considerations
When carrying out administration of non-cash assets, PRs can choose to
- Sell an asset - raise cash and distribute to beneficiary. PRs have power of sale
- Transfer an asset directly to beneficiary. PRs have power of appropriation
- PRs acquire the asset at probate value
If an asset is being sold, PRs should consider if it is more tax efficient to
a) sell it as part of administration (use tax free allowance)
b) transfer to beneficiary for them to sell (if beneficiary has not used their own tax-free allowance)
What does probate value mean?
This means the estimated worth of an asset at the time of the deceased’s death (it is used for calculating inheritance tax owed by the estate)
- Note specific, professional valuations may be required for assets
At what value do PRs and beneficiaries acquire the assets?
- PRs acquire assets at probate value (date of death)
- Subsequent transfer to a beneficiary is not a disposal - no chargeable gain
- Beneficiary acquires asset at probate value, not the date of transfer
How does a PR finalise the deceased’s IT and CGT position for the tax year of death?
- Record information and notify HMRC by submitting tax return on behalf of deceased for period 6 April to date of death
- Tax liabilities are a deductible expense when valuing the estate for IHT purposes
- Refunds due are an asset of the estate and should be included
In the absence of express provisions, what is the position on tax for a gift under the will?
- An individual gift in a will is made free of inheritance tax. IHT is payable out of the residue as a general testamentary expense
- But subject to the cost of transfer
What method of transfer is used for chattels, £ legacies, shares and land? Who bears the cost of transfer
- Chattels = delivery to beneficiary
- £ legacies = cheque or bank transfer
- Shares = stock transfer form
- Land = assent for legal estate in land (AS1)
Unless the will provides otherwise, beneficiaries bear the cost of transfer of asset
What are the PRs duties regarding estate accounts? Who should approve them?
- Duty to keep a record of the estate assets and how they have been administered
- Should be signed/approved by both PRs and residuary beneficiaries
- Usually includes: capital account, income account, distribution account
How should PRs choose which assets to sell?
- General power of sale over whole estate
- Use available cash and then sell non-cash assets
- Comply with statutory order
- Avoid CGT
- How easily/quickly can sale be carried out
- Consider wishes of beneficiaries
How long should PRs wait before making distributions?
- Wait until after 2 month deadline for being notified of claims from unknown beneficiaries/creditors
- If risk of IPFDA claim, ten months (as claim must be brought within 6 months of grant being issued)
How do PRs obtain receipt from minor beneficiaries?
- PRs must obtain confirmation of receipt from beneficiary when making a distribution
- Minor beneficiaries cannot give good receipt
Options:
- An express clause in the will which allows PRs to obtain receipt from 16-17 year olds is enforceable
- Parent/guardian provides receipt
- PRs hold property themselves on trust until minor is 18
- Appoint trustees to hold property for minor
- Pay legacy into court
When is an estate solvent?
Solvent = assets are sufficient to pay funeral, testamentary, administration expenses and debts and liabilities
- It is immaterial whether legacies can be paid in full or not
