Trust tax returns following probate

Savvy_Sue

Would be grateful if anyone could give me a few pointers before I pay for more advice from the accountant ...

Dad died Dec 2009, and I am joint executor. Everything went 'in trust' to me and my siblings, with his half of the house tied up for us as long as mum survives. We have complete discretion over the trust, apart from the fact that Dad would come back to haunt us if we did anything to upset mum ...

So we've obtained probate, and distributed most of the cash assets (kept a bit back to deal with situations like this!) All under the IHT limit.

We used an accountant to make sure we were doing things right, and he's now written to say:

For Income Tax purposes the Trust set up in the Will is deemed to have been in existence from 6 December 2009 to 1 July 2011, and relevant Tax Returns should be completed. Please let me know if you would like any assistance with these.

So I'm left with 2 questions: What Tax Returns are these? - a link to the right bit of the HMRC website would probably be enough!

And what's happened to 'our' half of the house - is that in a separate trust? Or floating free somehow ...

I am drafting an email to the accountant, but if I can avoid looking completely clueless I'll feel better ...

barak

Savvy_Sue wrote: »

.....So I'm left with 2 questions: What Tax Returns are these? - a link to the right bit of the HMRC website would probably be enough!

And what's happened to 'our' half of the house - is that in a separate trust? Or floating free somehow ...

Briefly -
[1] The Trust & Estate return is HMRC form SA900 - details for 2010-2011 at -
http://search2.hmrc.gov.uk/kb5/hmrc/forms/view.page?formid=3123&record=cpbJrbpAP7Y

[2] The Will itself would have set up a Trust for your half of the house.

getmore4less

This is my understanding. Will trusts justs happen

On death a trust exists for all assets "the estate"

Any special instructons can create other will trusts like

The house to children but mum still lives there
Money to anyone under 18

Between DOD and winding up of the estate trust there is the need for an estate tax return.

What I did was send a letter to HMRC with all the income and tax credits for up to DOD, and from DOD to winding up the estate(over 2 tax years) and they sorted it out.

Whats the significance of the July1st date?


Its not just income tax there can be CGT if assets move during administration.

I think there is a r27 involved for upto DOD

try this

http://www.hmrc.gov.uk/sa/trust-estate.htm

Savvy_Sue

July 1st is when we made the final 'main' distribution. What's left is to cover things like the tax etc.

Thanks for the pointers ...

John_Pierpoint

Hi Sue,

I think you are describing the "traditional" wording of a will. It "helpfully" reminds the executors that they are trustees.
(A legal position of the utmost good faith, where what the will tells them to do, coupled with what the changing of events suggests they should do, overrides everything else in their private life, even when it is not in the interest of the executor or their nearest and dearest).

You really need to supply the wording of the will, as you might have a "clever" will that is designed create a more fluid situation immediately following the death..... (what if both a husband and wife die in the same car crash etc. or one survives in intensive care for 18 months...........?).

Assuming that you have have a standard will that says.... "pay my outstanding debts and my funeral and then distribute the money as follows.......but my wife gets to live in the house for the rest of her days........."

Then the house is the asset of an Interest in Possession trust.

Are there any obligations to maintain the house or pay its other costs: Insurance, Utility bills, Council tax... and has any source of income been set aside to provide money to honour these obligations?

[My grandmother's will executed in 1966 had a situation similar to this and it put me as executor on a tread mill of sending in an annual "trust" tax return - right the way through until the beneficiary died in the new millennium. Prior to the 1990's I had to pay tax on account in advance - but the burden was a little bit relieved when the tax rules were changed for (what had become) very small value income. - it was a touch and go race between the beneficiary dying and the "trust" running out of money]

If, as I suspect, your Interest in Possession trust has a non income producing asset (Viz: half a house) you should be left alone as far as income tax is concerned. [My mother was in this situation thanks to dad dying intestate - We had a building society account left over from dad's administration, which could be used for any financial transaction - eg an insurance claim following the 1987 "hurricane", but the minimal taxed interest of say £10 a year was just ignored and left to roll up]
You will need to keep accurate records of the situation as the status of "the trust" will come up again upon the second death.

So who is asking for you to provide a tax return for the period of the probate and possible on going trust tax liability?

[ In the case of the late " Mr Dog ", who had his nest egg in a "bond" account that paid gross untaxed interest, I had a bit of a struggle actually getting HMRC to accept the income tax due for the 12 months before I could distribute the estate.
In reply to my second letter that enclosed the totals that would have gone on a tax return, I got sent a form P254 (to make a "voluntary" payment of what I had calculated was owing) abut someone had ignored this instruction: [FONT=&quot]HMRC to complete payslip, and overleaf for all payments in DECEASED and ESTATE cases[/FONT][FONT=&quot]. [sic][/FONT]
So I had a go at doing so.
In response to this payment I got an embossed letter telling me the estate was finalised.
The real problem was that the Income Tax part of HMRC was far behind the Capital Taxes part - but until such time as all the income tax had been settled, I was not in a position to finally finalise the capital taxes position.
I am pleased to say that I eventually got both aligned and managed to claim a refund of over paid IHT (plus 0.5% interest)]

My guess is that unless you have ongoing trust income, someone at HMRC is catching up with the reconciliation of Income Tax and just wants your figures for the period of your administration?

Are there any obvious reasons for thinking there may be unpaid tax somewhere: eg There is a need to reconcile the income figures you have given the beneficiaries on form R185, with the tax return of a beneficiary who is liable to 50% income tax? :D

Or perhaps more realistically the extra R185 income has catapulted some poor elderly relative from paying a marginal tax rate of 0% into the 20% band or from the 20% band into the 30% band ?
[I tried to explain these tax realities to the "dozen" beneficiaries of the will of " Mr Dog ", but I don't think the majority had I clue what I was trying to say.]

Good luck,

John

PS let us all know how it works out.

Savvy_Sue

John_Pierpoint wrote: »

[I tried to explain these tax realities to the "dozen" beneficiaries of the will of " Mr Dog ", but I don't think the majority had I clue what I was trying to say.]

:rotfl: I'm not sure I do either!

It's not HMRC on our case, it's the accountant we used to make sure we got the trusts right suggesting that we need to do tax returns. I think it's a 'normal' but slightly sloppy will: nothing said about maintaining the house or paying CT, and I'm certainly not putting ideas into my mother's head about the slightest possibility that she might no longer be responsible for such things! :rotfl:

I'll get my co-executor over here later, if I can. May go quiet for a bit as I'm off on holiday tomorrow!!!

Mikeyorks

Savvy_Sue wrote: »

July 1st is when we made the final 'main' distribution. What's left is to cover things like the tax etc.

Relatively unusual, in my limited experience, that immediately distributable assets - such as you appear to describe - would be left in Trust. There would be no point? Are you certain it's not the 50% of the house that's in Trust and the other assets are straightforward inheritance.

In which case (as John intimates) you have a Trust asset which doesn't create income and no Trust Return should be due - at all. The R27 - you mentioned in a previous thread - should be all that's needed. Subject that the estate received no untaxed income nor sold any assets during the administration period.

Savvy_Sue

Mikeyorks wrote: »

Relatively unusual, in my limited experience, that immediately distributable assets - such as you appear to describe - would be left in Trust. There would be no point? Are you certain it's not the 50% of the house that's in Trust and the other assets are straightforward inheritance.

This is where I start to get confused, AFAIK everything went 'into trust', but it was always intended that apart from the house, we'd distribute ASAP.

Mikeyorks wrote: »

In which case (as John intimates) you have a Trust asset which doesn't create income and no Trust Return should be due - at all. The R27 - you mentioned in a previous thread - should be all that's needed. Subject that the estate received no untaxed income nor sold any assets during the administration period.

Dad had had a lot of ISAs, which obviously hadn't been taxed in his lifetime: that's where most of what we distributed came from. We didn't sell any assets.

I couldn't see what there was to tax at this stage ...

John_Pierpoint

Perhaps the accountant is suggesting a nice set of accounts for the period from death until the final distribution?

Just in case of any future investigation and also to back up any claim for IHT relief on the second death - you would need to show who got what at the first death so that the percentage of the inherited nil rate band can be demonstrated.
Out of interest, who are the registered legal owners of the house now?

Did the ISA providers start deducting tax correctly from Dad's date of death ?

Accountants have been doing this sort of job for a long time, here is one from the colonies:
[FONT=Verdana,Arial,Helvetica][SIZE=-2][FONT=Verdana,Arial,Helvetica][SIZE=-2]
In 1798, the Deceased Estate Distribution account of Clara Bok,
who left no children of her own, listed among her heirs her sister
Catharina Bock's children, named as Andries Stephanus Gousch,
Sara Gousch and Clara Gousch. Since the Roman Dutch law then
in force at the Cape decreed that all children were entitled to an
equal share of parent's estate, this tells us that all the other
children of this couple had died before 1798 without leaving living
descendants. (Cape Archives, MOOC 13/1/22, 4)[/SIZE][/FONT][/SIZE][/FONT]

This link explains how it should be done to complete a professional job.
[I just wish it was as simple as the accounts make it seem afterwards]

http://www.acca.co.uk/pubs/members/publications/technical_factsheets/downloads/159.pdf

Savvy_Sue

John_Pierpoint wrote: »

Perhaps the accountant is suggesting a nice set of accounts for the period from death until the final distribution?

Possibly.

John_Pierpoint wrote: »

Just in case of any future investigation and also to back up any claim for IHT relief on the second death - you would need to demonstrate who got what at the first death so that the percentage of the inherited nil rate band can be demonstrated.

yes, that's all documented, with that in mind.

John_Pierpoint wrote: »

Out of interest, who are the registered legal owners of the house now?

Mum and (deceased) Dad. We looked into this, and decided that while we COULD change it, we didn't HAVE to. And it was likely to make Mum twitchy, even though no-one has any intention of making her move out.

John_Pierpoint wrote: »

Did the ISA providers start deducting tax correctly from Dad's date of death ?

Yes. Confused us no end initially!

Mikeyorks

Savvy_Sue wrote: »

I couldn't see what there was to tax at this stage ...

The ISA exits the protective wrapper on death. So any interest becoming due via the delay through Probate etc .... is taxable. But that should be done at source (20%) via the provider and clarified on the termination Statement. The R27 facilitates that (Tick Box 3) where it asks ;

Do you expect the estate to receive any untaxed income, or to sell any assets from the estate during the period of administration?

....... as it's been taxed then a 'No' usually suffices.

But it is important - from the point of view of the original question re Trust returns - to establish whether they were in / out of the Trust.