Income from rental property

getmore4less

One other thing to look at is the tenancy and what needs doing, One for a landlords forum

The tennats probably don't even need to know their real landlord has passed and can just carry on as normal.

wouldyoulikeacupoftea

nom_de_plume wrote: »

A relative passed away recently and included in their estate is a property that is rented out and producing an income. That property has specifically been left to one person. My question is what happens to the rent received after the death both imediately and during probate. Does the income form part of the estate or should it go directly to the beneficiary. If the latter is this from the date of death or date of probate?

I've been looking into this and was just coming here to post a similar question. This is what I think I've figured out, but others please correct me if I'm getting it wrong:

Wills are generally made up of "Specific Legacies" (an item specifically given to someone) and the "Residue" (everything thats remaining) - the Residue typically then being split between one or more people. When income continues to come in during the Administration period (e.g. rental income), the rules for Specific Legacies and the Residue are different.

NB: Working out whether something is a Specific Legacy or Residue can come down to the precise wording of the will, which is why having a solicitor involved might be useful if there is possibility of dispute.

Specific Legacy:
"The general rule is that the beneficiary is entitled to the income arising to that asset from the death of the deceased person. Sometimes however the personal representatives may by law be entitled to use the income for some other purpose."
http://www.hmrc.gov.uk/manuals/tsemmanual/TSEM7490.htm
Note that it says 'entitled to' - that doesn't mean they get it straight away. In practice the Executors are still responsible for everything until the Grant of Probate is received. Hence you might get a situation where the Executors pay the tax, and then give the net remainder of the income to the beneficiary after the grant of probate. e.g. see discussion here:
http://www.wilkinskennedy.com/services/tax/tax-factor/what-to-do-about-income-tax-when-someone-dies

If the beneficiary and executor are the same person then I guess this comes down to record keeping, keeping separate bank accounts etc so that what has happened can be clearly traced.

Residue:
It seems the income for items in Residue goes directly to the Estate and so the Estate must pay the inheritance tax. So for example a property not specifically given to someone in a will would form part of the Residue. If that property had rental income then that would also form part of the Residue, but the Executors would have to pay the income tax out of the estate.

I can't find many articles that mention the Residue directly in this context, I think because the estate (and hence the Executors) being liable for the tax is just the 'default' position.
http://www.hmrc.gov.uk/sa/rec-needed.htm
http://www.hmrc.gov.uk/bereavement/index.htm#7
http://www.hmrc.gov.uk/manuals/tsemmanual/tsem7413.htm

Note that in both situations (Specific Legacies and Residue), during the Administration period it is the Executors/Personal Representatives who are _responsible_ for the tax, and so when you read articles on the subject, they often only mention that aspect of it. The difference is that after Grant of Probate is received, beneficiaries of Specific Legacies are entitled to the net income during the administration period.

Everyone: Does that sound about right?

Disclaimer: I Am Not A Lawyer so I'd have to recommend getting proper advice, particularly if there is scope for disagreements between the beneficiaries.

getmore4less

http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM12082.htm

may be of some use

nom_de_plume

getmore4less wrote: »

remember a house with sitting tenants are not worth as much as a vacant posession but the lower the probate the higher the future potential for CGT.

Any transferable nillrate band available.

If the income did fall to the residual estate it would just end up paying the IHT.

If the residual is not enough to pay the tax then it will depend on the will and the strict order of legacies which get abaitment.

One other thing to look at is the tenancy and what needs doing, One for a landlords forum

The tennats probably don't even need to know their real landlord has passed and can just carry on as normal.

The property is in fact a business premises let out on a fairly new lease which I was involved in the negotiation of so I'm satisfied with that aspect. I'm looking to hang on to the property as part of my eventual pension plan.

There's no transferable nil rate band available unfortunately.

As for abatement, that's a new one on me. I did mention in my first post I was on a steep learning curve.....

getmore4less

nom_de_plume wrote: »

As for abatement, that's a new one on me. I did mention in my first post I was on a steep learning curve.....

It is not always obvious or as logical as you may think who is responsible for what bits when there are shortfalls in the cash department.

As a significant benificiary and executor you may find that professional help(with indemnity) may be a worthwile investment once you have all the details of the estate.

nom_de_plume

Thanks for all the advice, etc. so far. I am certainly in agreement that a professional opinion will be worthwhile. I'm up to dealing with the legwork up front but given the overall value of the estate and the number of beneficiaries I want to get it right when it comes to putting it to bed.