"The Estate of Mr Dog" - Beneficiaries income during administration reported on R185s

John_Pierpoint

In the good old days, when life was simple and an estate could be sorted out quickly (in theory - we used to blame the solicitor, now we can blame HMRC). income was allocated to the tax year in which it arose by giving each beneficiary a simple A2 sized form for the year. The beneficiary put these details on their tax return.

Now the form is bigger (surprise surprise).
http://www.hmrc.gov.uk/pdfs/r185_ei.pdf
and the income of the beneficiary is reported in the year in which they get it.
The assumption seems to be that the payments to the beneficiary always include the income before they include the capital.

In the case of the estate of Mr Dog, who died in autumn 2008. I opened a postal account with a building society promptly. It accepted payments from those institutions prepared to pay before probate was granted Eg Prudential.

It took me 6 months to track down the value of all his possessions and pay his 07/08 outstanding income tax. I then applied for probate.
It took until the middle of the year before I got it!

I promptly paid out the specific bequests (to avoid having to pay interest on them).

Before Christmas 2009 I had sorted out 90% of the estate so I had another distribution of the great majority of the funds that I had piled up in the building Society.

I am still waiting for the last 1% of the estate to resolve itself, and I have still to receive final clearance from HMRC so I have kept back enough funds to pay any last minute nasty shocks.

Meanwhile the postal account at the building society has been credited with a chunk of taxed interest.

Do I put the 15 months of income received before Christmas 2009 on the beneficiaries R185's or the 19 months up until 05 April 2010 ?

Some beneficiaries would prefer the 15 month answer as this should reduce the effect of the 19 months of extra income on their 40% tax liability.

[I had warned them about what would happen but I'm still being treated as someone who has lobbed a hand-grenade into their tax affairs - blame the messenger].

John.

PS on reading the instruction in the link I've found above it looks like the 19 month answer is the correct one:mad:.

Any tips from people who have had dealing with R185 recently?

John_Pierpoint

Ah there always has to be a joker in the pack.

Within a few months of death, Mr Dog's holding of Premium Bonds had generated 250 GBP of prizes

This instruction from NS&I does not mention tax:T
To keep the Bonds invested, you’ll need to send the Bonds to us along with the completed claim form. Bonds can’t be transferred into another person’s name but will be kept on record for 12 months and prizes will be sent to the person who is entitled to the money.

Unlike his other "investment" income, this has not been taxed and so does not fit on the form.

Is this "Capital" ?

John_Pierpoint

Still talking to myself here.

Hey Ho - I've got to split these totals into 10 unequal shares and get it right to the penny.

Think I'll dump the spare pennies on the forms going to the recipients who don't pay 40% tax.

John_Pierpoint

Here is another question as I anticipate the beneficiaries getting their R185's.

Can this Estate/trust income be entered into the HMRC on-line income tax self assessment return?

A few years ago it definitely could not be but I think the system has been upgraded since then?.

Has anyone actually entered figures from a R185 into their on-line tax return?
Does it ask for any unexpected information, such as the tax ID of the executor making out the R185?

dzug1

John_Pierpoint wrote: »

Ah there always has to be a joker in the pack.

Within a few months of death, Mr Dog's holding of Premium Bonds had generated 250 GBP of prizes

This instruction from NS&I does not mention tax:T
To keep the Bonds invested, you’ll need to send the Bonds to us along with the completed claim form. Bonds can’t be transferred into another person’s name but will be kept on record for 12 months and prizes will be sent to the person who is entitled to the money.

Unlike his other "investment" income, this has not been taxed and so does not fit on the form.

Is this "Capital" ?

It's income but it's not subject to tax and does not need to be included on any tax return.

That's the case for an individual - I can't see that an estate is any different.

John_Pierpoint

I think I agree; however that is not true for the interest added to his NSI ISA after death.
That came with a letter pointing out that the sum was taxable, all 170 GBP of it.

dzug1

That's ISA rules - not specific to NSI but apply to any provider

barak

John_Pierpoint wrote: »

The assumption seems to be that the payments to the beneficiary always include the income before they include the capital.....

.....Before Christmas 2009 I had sorted out 90% of the estate so I had another distribution of the great majority of the funds that I had piled up in the building Society.

I am still waiting for the last 1% of the estate to resolve itself, and I have still to receive final clearance from HMRC so I have kept back enough funds to pay any last minute nasty shocks.

Meanwhile the postal account at the building society has been credited with a chunk of taxed interest.

Do I put the 15 months of income received before Christmas 2009 on the beneficiaries R185's or the 19 months up until 05 April 2010 ?

PS on reading the instruction in the link I've found above it looks like the 19 month answer is the correct one:mad:.

I had this problem myself and spoke to a tax accountant. As you say, any distribution is considered to consist of any interest received first - the remainder being capital.

But, if I got it right, my understanding is that if you haven't made any further distribution since the one before Christmas 2009, then the R185s for 2009/2010 should only include BS interest paid up to the date of that distribution. Any further interest will be considered to be the first chunk of the next distribution and included in R185s for the tax year in which the next distribution is made.

That does seem to make sense, because otherwise you would be altering the nature of the original distribution retrospectively - but I could be wrong!

John_Pierpoint

Not what it appears to say on the form?!.

Hey Ho perhaps the income tax will go up at the end of the month and I will become that far sighted chap who anticipated the tax changes - don't forget Discretionary Trusts are on 50% already.


Personal representatives may complete the relevant boxes on page 2 and give the form to the beneficiary.
For the purpose of this form, a ‘sum’ includes cash, assets transferred or appropriated, and debts set off or released.
The residue is what is left in the estate after you have paid all debts, legacies and taxes.
If the administration period has been ongoing for more than a year, the following example shows how to work out the income which each beneficiary should show in their tax return/repayment form.

Step 1
Add the net amount (the amount after tax taken off) of the beneficiary’s share of the income from the residue for the tax year to any net amount brought forward.

Step 2
Compare the figure in Step 1 with the sum paid to the beneficiary in the tax year.

• If the sum paid is greater than or equal to the result of Step 1, the beneficiary’s share of the income from the residue for the tax year is the amount at Step 1.

• If the sum paid is less than the result of Step 1, the beneficiary’s share is the sum actually paid in the tax year.
The balance of the beneficiary’s entitlement is carried forward to the next tax year, and will then be their income entitlement in the next year if no distributions are made.

For the final tax year of the administration period, the beneficiary’s share of the income from the residue will be treated as having been fully paid.

barak

Yes - you seem to be right. I get the feeling that your estate account is receiving monthly interest. Mine had annual interest which perhaps made it a bit more straightforward.

John_Pierpoint

Well it was.
If you think back to the winter of bankruptcy 08/09, institutions were offering circa 5% on bonds, because the interbank market had frozen?.
Well the estate had inherited some sort of roll over arrangements with two such institutions for funds well into 6 figures; so I took the trustee's executive decision, in the interests of the beneficiaries, to allow this arrangement to run to maturity:D

However there is a down side.
I seem to have triggered a turf war within HMRC, with one section saying "this is a trust - there is income over 10K in there somewhere"; over to you.
Only to have the trust department say "You can have this back, it is just a bog standard will and it is not worth a 1,000,000".
....and so it goes.

Let us blame the new computer system that allows the files to be accessed by offices that know nothing about them - so must have to do a massive amount of reading up before they get their head round what is going on.:eek:

So far I have had dealings with FIVE geographically different tax offices and HMRC has won the competition for the worst organisation involved, a close run competition with Barclays bank as runner up.