How should accrued interest on savings gets taxed

Alan_P_2

My question is about income tax payable on interest paid on saving accounts where interest would normally be added anually, when someone dies.

An example using totally fictitious numbers may help with the question and hopefully someone can then give a simple clear answer:

On death I was told:
Account balance at start of year £10000
interest paid before death £100
Interest accrued up to date of death £200
Total of account at death £10300

Then after getting probate and closing account I am told:
Balance brought forward £10100
Interest paid on closure £600
Balance on closure £10700

So is there £300 to be treated as taxable for the deceased with £400 as taxable for the estate in administration.
OR is there £100 to be treated as taxable for the deceased with £600 as taxable for the estate in administration.

Also for inheritance tax and probate purposes, was the saving account worth £10100 or £10300

MovingForwards

Were they above or below the IHT threshold? As that's the bit you need to think about.

Alan_P_2

Below IHT threshold, but my question is primarily about income tax. Is the accrued interest counted as part of the deceased persons income or the income of the estate in administration?

xylophone

See https://www.litrg.org.uk/tax-guides/bereavement/how-estate-taxed-during-administration

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem7262

Alan_P_2

@xylophone
Thank you very much for those links.

Your 1st link I have read, but couldn't find an answer there.
Your 2nd link I haven't seen before. I think that certainly should answer my main question

But I really struggle to reconcile what the bank means by "accrued interest", and showing it included in the total balance of the account at death;
and what HMRC mean by the phrase "was not paid or credited until after the date of death".

Maybe I just need someone to confirm that "accrued interest" explicitly means NOT credited - even though the bank includes it in the total balance.

But then, if "accrued interest" is not part of the personal income tax if it means neither paid nor credited, then should it actually be counted for probate/inheritance tax calculations. That would seem contradictory.

getmore4less

Will it make a difference to the tax paid in the end?

If you include it all in the estate taxed at 20% the beneficiaries will get a tax credit for that 20%

The admin return is usually done on an informal basis you send a list of income and tax paid they send the bill/refund.
(I sent return to DOD and estate admin periods at the same time go a refund and bill for different periods)

Given you have both reports from the bank I think you could do it which ever way you preferred as long as all the income is accounted for I think HMRC will be happy, if they want it changing it will be a simple adjustment.

Alan_P_2

In this case, I think it does make a difference to the tax due.

As she died just 7 weeks into the tax year, then if counted as part of her personal income she still would be well within her personal allowances.
But if counted as part of the estate under administration then there is no personal allowance so full 20% tax due.
My understanding is the beneficiaries can only reclaim the tax paid for the estate under administration, if their personal income plus the interest earned after death is less then their allowances - but maybe I misunderstand that as well.

Robert_McGeddon

Generally, interest is taxed at point of receipt.

In your example in post #1:
A) £100 was credited before death. This should be included in the deceased's final personal tax return (assuming they did TRs), and
£600 was credited (i.e.received) post death. This is to be accounted for by the executor/administrator and any tax due paid by them. But the tax due (£600@20%) of £120 is below the £200 threshold noted in xylophone's 1st link above so if the death is recent and there is no other interest income during estate administration then no tax is due by the estate and no return need be made.

HTH.

xylophone

From your example, it seems to me that at date of death, the deceased had received £100 in interest (and apparently retained it in the account) and that was taxable on the deceased.

The deceased died before the next date for payment of interest so that £200 had accrued towards the payment that would have been made on the next payment date.

Therefore interest paid/accrued up to date of death was £300.

At closure of the account, it held the capital (£10000) plus the interest actually paid out before date of death and retained in the account (£100), the interest accrued but not paid out up to date of death (£200) and the interest accruing after the date of death (£400).

Amount paid to PR £10,700 of which £600 ( interest accrued but not paid before date of death plus interest accrued after date of death) is taxable as estate income.

You could check with HMRC.

Alan_P_2

Thanks Robert, for a nice clear answer. I believe you are correct.
(My example simplified the situation as the amount is actual higher, and there are also dividends involved in the estate, though this can still be handled under the informal rules.)


But I'm still left puzzled by what I should have declared for probate and inheritance tax purposes (not that it would make a material difference to them in this case). Should the accrued interest be counted as part of the value of the estate at date of death for them, even though NOT include on the deceased's personal tax return?

Alan_P_2

Thanks xylophone. Your answer agrees with Robert's - which adds to my confidence. And gives me the answer I need.



Yet I'm still puzzled by how this relates to probate/IHT, as I've just said in my reply to Robert (#10) ?