Tax on Income after a death

alun4

A relative has recently died (in May). She was getting two occupational pensions (circa £13000) + state pension + attendance allowance + income from building societies (circa £15000) + building society ISAs (circa £3000) and some dividends (circa £3500). Home sold in 2006 to go into care home. Husband had died 15 years earlier with no children and everything left to my relative.

There are 5 beneficiaries receiving £2000 each (free of taxes) and the residual beneficiaries are to receive the residual estate in equal shares.

The Building Society investments (£420,000) are in 5 year bonds which average 4.8% gross.

Does the income of the estate form part of the residual beneficiaries income? (From the date of death?) (From when Probate will be granted?)

Could the residual beneficiaries let the estate run after probate to get the advantage of the high interest rates?

Any disadvantages spring to mind! ?

John_Pierpoint

Step one: Do a tax return of 06apr11 to date of death (The executor might well need to do one for 10/11 tax year too - check the figures).
If the deceased was already a self assessment tax payer - then I would advise doing a proper self assessment return - as in my experience the system is not good at reconciling the R40 or R27 with the existing payments on account for self assessment. "Oh I suppose you will be wanting the repayment of the money paid on account" ..........[Thinks: Yes that is what I've spent 3 days trying to get through on the 0845 number for:mad:]
The executor will most probably get a bit of income tax back for the 11/12 period up to the date of death.

Step two Is the estate liable to Inheritance Tax? [If so there are deadlines involved] Actually it looks like there might be a spouse exemption claimable BUT the executor will have to fill in the IHT400 forms including the one where the brought forward spouse exemption has to be claimed. Our friends at HMRC would like the IHT40x self assessment forms submitted, with any tax paid in the first 6 months after death - otherwise interest will be charged.
There is a fast track procedure (now) when it is obvious that no IHT will actually be paid, as a result of the spouse (or other legal partner) percentage exemption brought forward.

Step three Get probate and pay off the specific bequests ASAP. (That gets them off the executor's back and if they were kept waiting for over a year they could be expecting interest on their bequests).

Step four: Who are the residuary beneficiaries? How many?
Some might need the cash urgently?! but if I was the residuary beneficiary, I would be happy for the executor to let those "building society" bonds run on to maturity; while acting as my bare trustee.
The income of the estate goes in proportion to the residuary beneficiaries and form R185 is sent to them to certify the tax already paid on that income.
http://search2.hmrc.gov.uk/kb5/hmrc/forms/view.page?record=6hW2AsyzoO0&formId=3172
For Income Tax purposes the income arrives when the institution paying the income does so (ie there is no need to try to apportion into pre and post death; BUT for IHT accounting you have to ask how much income had accrued prior to death - and then get stung for IHT and Income Tax on that amount).

The ISA, wouldn't be an income tax free ISA as soon as the individual who owned it died.
Has the executor checked that the "bonds" can be allowed to run to maturity? There may be a clause about reverting to "standard rate" (0.5% ???) on death.
[I was the executor for my uncle - Mr Dog - and he had just one "bond" with Barclays: I had to write TWICE saying the interest had been calculated incorrectly and eventually received two additional cheques. But it was a bit of a weird bond that paid gross interest]

For the first two whole tax years after death, the estate (trust for that is what it is) has an independent tax identity of its own. So as far as CGT goes - so you might want to have some things sold by the executor rather than transferred to the residuary beneficiaries, and then they sell? Especially if there has been IHT paid and then shares are sold at a loss against their probate valuation.

I hope this is of some help, given the lack of detailed information about the estate.

John.

PS: Something like 97% of estates complete their administration within two years of death.

alun4

A very sincere thank you for the valuable answers. I will fill in some of the gaps as the "more detailed" information might be a help for others as well.

1. I am joint executor and have notified pension providers, (private and state) immediately. Also the Building societies. I have now notified HMRC and will this week tell the bank. My reasoning was that the care home fees would go through the account and the dividends due but yet to be paid in the period just after death would also be recorded to make life a little easier. Closing prices of the shares on the date of death were recorded. The tax return for 10/11 was done prior to death (just). I am not sure what you mean by payment on account as the income was tax paid interest, dividends and occupational pensions.

2. IHT threshold is close. There are all the documents in place for late husband's transferable allowance. She had started to gift to the residual beneficiaries following a discussion with Lloyds Bank to use her income/normal expenditure 4 years and 3 years ago with the intent of it being continuing but I felt it wrong to continue this once we started to use a Power of Attorney and she had left her own home. Those gifts (including annual exemption (1st year £6000, 2nd year £3000) if added back into the estate would bring estate £50000 over IHT threshold. So I am saying at the moment the estate will be about £8,000 below.

3. The named beneficiaries are the children of the other executor/residual beneficiary. But there will be money to pay them after probate - quickly.

4. The two residual beneficiaries are a niece and me (her cousin) we are the joint executors

You have made a very interesting comment regarding the Bonds running on to maturity. Nationwide returned the death cert giving details of how the Bond with them could run or not and confirmed the interest rate (very helpful) Principality (on the telephone) advised the rate would be the standard rate from date of death. I queried this a few days later and spoke to a "manager" who confirmed the low interest rate from date of death. I wrote a letter of dissatisfaction to the General Manager and the reply stated the interest rate would be the agreed rate of the bond and that it could be cashed or kept running to maturity!

The shares are a few thousand down from the value at the date of death.

If there are other things you think I should add to help others, please let me know. I again thank you for the considered input of your reply.

John_Pierpoint

The estate for which you are the executor, sounds like it was kept "up to scratch" in financial terms, so your administration should not unearth any nasty surprises. You should already know where the assets are and you (no longer?) have the hassle of owning and selling real estate.
I was able to use the local library to get the latest versions of the three "Which?" books for my uncle's estate.
http://www.amazon.co.uk/dp/1844901181/ref=rdr_ext_sb_ti_sims_5
(Even still the concept of the transferable nil rate band was a new concept in 2008 - so were the IHT400 forms - so these changes were not then in the "Which?" books, however the 2006 changes in trusts were.)
I don't think there have been major significant changes in the legislation since 2007.
The 80/20 effect applies to anything you have to do and in my case the worst institutions were Solicitor (partially intestate will) Barclays (subcontracted to ITC) and HMRC (Income tax) - there are threads running on here highlighting these deficiencies; but at the time I was looking in the mirror trying to understand why it was "just me" that had such problems.

The saga started here:
http://forums.moneysavingexpert.com/showthread.html?t=1164505
and it can be picked up by going to forum search (advanced) see forum bar above and then entering the following three entries in appropriate boxes:

Dog
John_Pierpoint
Cutting Tax
(Should give a two screen list of threads)

or paste “Mr Dog” site: forums.moneysavingexpert.com into Google.

I have annotated your posting below with bold script.

alun4 wrote: »

A very sincere thank you for the valuable answers. I will fill in some of the gaps as the "more detailed" information might be a help for others as well.

1. I am joint executor and have notified pension providers, (private and state) immediately. Also the Building societies. I have now notified HMRC and will this week tell the bank. My reasoning was that the care home fees would go through the account and the dividends due but yet to be paid in the period just after death would also be recorded to make life a little easier. Closing prices of the shares on the date of death were recorded. The tax return for 10/11 was done prior to death (just). I am not sure what you mean by payment on account as the income was tax paid interest, dividends and occupational pensions.

All up to date. Mr Dog & the tax man had got into a real mess as there was untaxed income greater than this taxable PAYE income. So even with a "K" code (50% tax) he was getting deeper into debt.
Then the tax man put Mr Dog onto self assessment, and that requires a January & July cycle of tax on account.

2. IHT threshold is close. There are all the documents in place for late husband's transferable allowance. She had started to gift to the residual beneficiaries following a discussion with Lloyds Bank to use her income/normal expenditure 4 years and 3 years ago with the intent of it being continuing but I felt it wrong to continue this once we started to use a Power of Attorney and she had left her own home. Those gifts (including annual exemption (1st year £6000, 2nd year £3000) if added back into the estate would bring estate £50000 over IHT threshold. So I am saying at the moment the estate will be about £8,000 below.

Sorry - as you are claiming the spouse exemption you may have to get involved in the whole IHT400 experience - however there is a fast track procedure for estates with no IHT to pay - try to find it on the HMRC site (it was new in 2010)
http://www.taxationweb.co.uk/forum/tnrb-available-iht205-or-iht400-t30599.html
Found it I think:
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/InheritanceTaxEstatesAndTrusts/FormsforprobateandInheritanceTax/DG_187490
3. The named beneficiaries are the children of the other executor/residual beneficiary. But there will be money to pay them after probate - quickly.

Going to advertise for creditors and other claimants to protect your position?

4. The two residual beneficiaries are a niece and me (her cousin) we are the joint executors

Nice small family, where everyone lives locally and gets on and the will is very "fair"?
The probate people at the time of my mother's estate, tried to get one of us two siblings to drop out - but I felt it was important to keep my sister on board to avoid future recriminations

You have made a very interesting comment regarding the Bonds running on to maturity. Nationwide returned the death cert giving details of how the Bond with them could run or not and confirmed the interest rate (very helpful) Principality (on the telephone) advised the rate would be the standard rate from date of death. I queried this a few days later and spoke to a "manager" who confirmed the low interest rate from date of death. I wrote a letter of dissatisfaction to the General Manager and the reply stated the interest rate would be the agreed rate of the bond and that it could be cashed or kept running to maturity!

Two thousand people a day die in the UK, so you would think that every organisation would at least have one individual, charged with sorting out "bereavement" situations.

The shares are a few thousand down from the value at the date of death.

Were you to sell them all, you could claim the reduced value as the probate value, thus getting back 40% of the loss, if IHT had been paid.

If there are other things you think I should add to help others, please let me know. I again thank you for the considered input of your reply.

Good luck

John.

John_Pierpoint

She had started to gift to the residual beneficiaries following a discussion with Lloyds Bank to use her income/normal expenditure 4 years and 3 years ago with the intent of it being continuing but I felt it wrong to continue this once we started to use a Power of Attorney and she had left her own home. Those gifts (including annual exemption (1st year £6000, 2nd year £3000) if added back into the estate would bring estate £50000 over IHT threshold. So I am saying at the moment the estate will be about £8,000 below.

There is an argument that says an attorney is in a position of trust, and a trustee must always act to the benefit of the person for whom he/she acts, even when it is to the attorney's own detriment, and giving away their money cannot be in the "frail" person's personal interest.

The only valuation that I had queried was the house valuation and the only valuation that stuck in my throat was the contents valuation, in reality the latter was probably negative as it cost money to get rid of the remaining junk after the beneficiaries had picked out a few pieces for themselves.

alun4

John_Pierpoint wrote: »

There is an argument that says an attorney is in a position of trust, and a trustee must always act to the benefit of the person for whom he/she acts, even when it is to the attorney's own detriment, and giving away their money cannot be in the "frail" person's personal interest.

The only valuation that I had queried was the house valuation and the only valuation that stuck in my throat was the contents valuation, in reality the latter was probably negative as it cost money to get rid of the remaining junk after the beneficiaries had picked out a few pieces for themselves.

Your reading regarding POA was mine as well so the gifts stopped - despite joint POA (same as now executors and residual beneficiaries) knowing that my cousin wanted to avoid IHT and by all reasonable thoughts her living standards and hopes could not be compromised.

We did end up with a no cost clearance of the property, (after getting an auction house to come and look (saying NO Thanks). I guess this will have to be stated on the IHT form.

I followed the threads you mentioned. I can relate to the horror of the journey and the frustration you experienced. I think there is much to be learned from your experience and from the (sometimes) well meaning but inaccurate advice of the early respondents to your questions. There are also knowledgeable people giving thought provoking, excellent advice.

The financial planning for beneficiaries of a high value estate is something you have also brought into focus ... but that is another time!

Thank you, again.

Regards,
Alun