IHT/Income Tax on same amount?

caper7

Hi, Hope this is the correct place to post this...

I have been doing the IHT for a relative. In the IHT 400 form, box 76 I entered the value of an asset, and some gross income that the asset earned up to the date of death, but that was paid after death.
However, I included this income on the income tax (until death) form as well.
Although I can see that it is income that should be income taxed and that the lump sum remaining is part of the estate and liable for IHT, on the IHT form they ask for gross income meaning I've paid 40% on the 20%(basic rate) income tax. Is this right? Have I made a mistake?

Sorry if I haven't explained this very well, any help appreciated.

SeniorSam

Although your explanation is a little vague, as you say, it may be that 40% income tax has been charged if the income was that of a Trust. Any income after death is not the income of the deceased, but the Trust being held by the Executors. You can query this if you wish and if in error, I feel sure it can be corrected. Suggest you do not worry too much as errors are usually corrected.

Sam

John_Pierpoint

Yes it gets right up your nose does it not, having to pay 40% IHT on marginal accrued income that the deceased never had and then 20% income tax, making 60% in all; all because the deceased owned his own house!

If the deceased was a 40% higher rate tax payer there can be some relief claimed, but the calculations are a nightmare

In my humble opinion opinion all interest paying institutions should close the deceased's accounts as at the date of death, crystallising the interest and tax for the deceased. Then immediately reopen them in the name of "The personal representative of xxxxxxx deceased"; but that is not the way it works.

What was the source of the "gross" interest and when did the deceased die?
Unlike the change of identity, when Miss Smith becomes Mrs Jones, which used to encourage Autumn weddings with a tax refund to pay for the honeymoon; organising an autumn funeral can still result in a tax refund.
Have you done the last of the income tax returns for the deceased yet?
What form did you use for the last part tax year?
Was the deceased already part of the self assessment system?

(I had a horrendous learning curve for my late uncle - Mr Dog - as his income tax was in a real mess and HMRC had him on a "K" code for PAYE income tax BUT his gross pension income was only about 1,300 a year and he had been getting deeper into income tax debt for several years,)

caper7

Senior Sam, thanks for the response.
No trusts involved though.

John Pierpoint, also thanks for the respose,
My relative died in March 2009
I did the SA100 tax return for 08/09 until date of death (relative was a basic rate tax payer)
I also did the IHT 400 inheritance tax return
As I am executor and sole beneficiary, i have been told that after death I add all relative's income to mine.
There was a box on the IHT form for any income due to the deceased but received after death. I was just unsure whether said income should have also been on the income tax until death form as well.
I declared it on both, was unsure whether that was a mistake?

John_Pierpoint

As you relative died in March and the end of the tax year is 5th April there would not have been much of a rebate of PAYE involved.
[My mother died in April, her self assessment tax returns were several years in arrears (in those days she used to get a modest refund each year for the then 10% tax band on her savings interest) - I managed to get back about a fiver for that April]

What is this "income", that continued after death, of which you speak?
Usually it is interest or dividents both of which are deemed to pay basic rate tax at source.
Were both you and your relative standard rate tax payers at the margin.

Provided you have not reported the income twice, once for your self and once for the late relative - or neither of you have been pushed into a higher rate band (pensioners have a 30% tax band, if you don't understand what I'm saying let me know and I will try to explain) then reporting the taxed income twice won't have made any difference to the tax take anyway.
My understanding is that under self assessment income (except trading profit) goes into the tax year of its receipt, ie for Income Tax purposes the accrued not yet paid income would be payable to you as executor and trustee of the estate [and then you would pay it to yourself as a beneficiary (complete with an R185 explaining to yourself what you had done):D] - if you wanted to get clever you might have been able to fiddle about with CGT allowances by selling some assets as a trustee/executor and assigning some to yourself and them selling them - but I guess nobody was making much in the way of capital gains in early 2009 ?!

[I might be wrong about the above but Alice in Wonderland will be along to put us right, if I am]

Personally I found sorting out the Income Tax mess of my late uncle - Mr Dog - more trouble than the IHT aspects.

The income tax people first suggested that I use the on-line SA system (not allowed for executors in 2009 !) & then sent me a grotty little brown form (R27) for his last 6 months - completing that was a big mistake, because nobody told the Self Assessment system that he had died. or stitched the R27 into the SA system.
So the SA system went into overdrive churning out interest and penalties accompanied by nasty threats.
At least you avoided that treatment.

caper7

I know nothing of a PAYE rebate, don't know if I'm owed one, I did do the R27 form, I think I sent it with the SA100.

The investment is complicated, a debenture type of investment. The income is paid twice a year, gross. I treat the two payouts like dividends, however the money paid reflects what the investment earned in the 6 months up to that date.
So I effectively put two and a bit dividends in relative's 08/09 tax and was planning to put one and a bit dividends in my 09/10, and then be back to the usual two dividends in a tax year.
It was only because I was told I must declare all income due until death, that I put part of what I would normally have put in the following tax year.
Quite frankly, don't know if it's correct or not, but everything will have been declared for income tax, and taxed at 20%.
My main concern was whether this sum should have been on the IHT as well, which it was.

Both myself and my relative are basic rate tax payers.
No trusts.
No CGT, because nothing was sold, and nothing is going to be sold.

Don't know about R185 form, just had a quick look at it, do I need to do this if I'm executor and sole beneficiary, and just taking over all investments?
I certainly hope not! will it never end!?
Also given relative died in 08/09 tax year, this will span 3 tax years! That will teach me to drag my heels.


Thanks for all your comments so far.

John_Pierpoint

Could that "income" have been one of those insurance type products where the investor is allowed to extract 5% a year and count it as return of capital rather than taxable income?

[I managed to fix up my late mother with a product that had sold the income from the fund to pension funds but generated a constant "income" by selling enough capital units each year to mop up a chunk of her annual CGT allowance - It could be a bit of a white knuckle ride when the market declines but it kept its value in nominal terms.].

While I was struggling to sort out my late uncle's income tax, I did some Googleing and found this useful guide to taxation

http://www.flmemo.co.uk/downloads/tax/tax_extract_2009_crop.pdf

It explains quite well the treatment of "accrued" income and how shares backdate to the declaration of the dividend, not the day the divi cheque drops through the letter box. (it sort of make sense, because as soon as a dividend is announced the value of the share goes down by roughly the amount of the proposed dividend)

I tried very hard to dream up some tax allowable expenses - but it seems my major expense of getting to uncle's house, 1.5 hours away by car, was not allowable tax wise.

The treatment of income that has already been subjected to IHT is mentioned at "7244".

I think it wise to go through the motions of giving yourself a R185, just to make it clear - should any of this be audited - that you understood the difference between your own income and that of the administration period of the will, when you were the trustee.

You don't want to be in a Lord Kagan situation - I really got the impression that Harold Wilson's mate did not understand the difference between himself and the company he owned - it was all "his".

http://en.wikipedia.org/wiki/Joseph_Kagan,_Baron_Kagan

http://www.independent.co.uk/news/people/obituaries-lord-kagan-1568684.html

caper7

In relation to the R185, I've been told that as sole beneficiary everything was mine immediately after death, even though I had not got probate yet and officialy put things in my name.
I thought this was why I could add all income after death to my own tax returns, while usually executors have to file tax returns for the administrative period (which has no personal allowance). Is that not the case? I thought this was why R185 and any talk of trusts simply didn't apply to me.

John_Pierpoint

It is up to you. Your chances of being audited are small and anyway you may have paid too much income tax.
In a life time of dealing with the tax man over family tax matters, only twice have I had my returns queried.

In both cases I just had to provide additional information/copies of original documentation and heard no more about it.

If you were asked for an account for your period of administration of the estate, could you provide one that showed all your ins and outs?