Paying out the income from the estate of Mr Dog (Question 1)

John_Pierpoint · 30 March 2010 at 6:04PM

I have at long last reached a settlement with Barclays Bank, the last of the organisations (other than HMRC) with an interest in the estate of the late Mr Dog.
http://forums.moneysavingexpert.com/showthread.html?t=2204561

So far I have distributed specific bequests (Car furniture that sort of thing) and financial legacies.

All the beneficiaries share in the residuary so get to share any income the estate receives during the period of administration..
However the form R185, which certifies to the beneficiaries the amount of different types of income the estate has earned for them since the death, makes it clear that the first sums to be paid out must be INCOME not CAPITAL, up to the value of the estates income as at 05April 2010.

Now two of the several beneficiaries have arranged their affairs to be just below the additional income tax rate of 40% and these payments of 18 months income will put them into the 40% band and give them the chore of Self Assessment.

However I have found the following cryptic instruction on the HMRC web site:
http://www.hmrc.gov.uk/trusts/ben_iht.htm

FAQs - Beneficiaries

Q. The personal representatives received income that was treated as part of the estate for inheritance tax purposes. Can I, as beneficiary, claim tax relief for this?

A Yes, but only if you are liable to tax at the higher rate. Please ask your tax office about the special tax relief that is available.

I know what they are getting at:

When doing the IHT400 tax return one has to report not just capital values but also "accrued interest" - that is interest earned on savings that has not been paid out yet. As the estate of Mr Dog was worth ,ore than the nil rate band IHT was payable.
So this "accrued interest" gets taxed at 40% for IHT and a further 20% gets stopped out of it for standard rate income tax, before the executor/trustee gets it.
Another 20% making a total of 80% for a higher rate tax payer really would be "taking the biscuit".

Well I have written and asked about the special tax relief that is available, TWICE. I have also tried the "phone a muppet" service. The letters have gone unanswered and the telephone service did not begin to understand my query.

Can anyone on here help. I need to be able to explain to the beneficiaries and explain the calculation of the special tax relief.

Many thanks in advance,

John.

John_Pierpoint · 31 March 2010 at 2:24PM

Thanks jimmo - I followed your link and disappeared into a manual, presumably written by the "Trusts" office in Edinburgh, for the next couple of hours:mad::D.

I've also managed to find a worked example via Google from some sort of legal accountancy organisation.
They offered the following worked example, which I have precised a bit.

Mr A died in 09/10
His estate now has an income of 50,000 of which 15,000 was accrued at the date of death.
The average rate of IHT for the whole estate is 25% (In my case it is more like 5 %;))

So the calculation for Mr B the sole beneficiary is:

15,000 accrued income.
( 3,000) less basic rate tax a 20%

12,000 net accrued income
3.000 Inheritance tax on this.
3,750 Grossed up ( * 100/80)

50,000
(3,750) relief.

46,250 Liable to additional rate tax.

However this does not tell me what to put on the R185's nor does it explain what happens if part of the beneficiary's income is liable to standard rate and part additional rate.
(To my was of thinking it is obvious that the accrued income is a top slice in terms of IHT and so all of it has already paid 60% tax and no more tax should be payable - but who ever said there is any logic to tax).

Paying out the income from the estate of Mr Dog (Question 1)

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