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Distributing an estate - income tax

Bobziz
Posts: 644 Forumite

Hi,
I'm the executor of my late mothers estate and would like to confirm my understanding of how I need to distribute her estate, including income generated after she passed, estate income.
The Will divides the estate into three equal shares and no IHT will be due. However, the estate will generate significant income after death, which will be taxed at 20%. For one of the three beneficiaries, their share of the estate generated income will push them into the higher rate tax bracket, and they will be required to pay a further 20% income tax.
A possible solution may be to distribute less estate generated income to the beneficiary who would be subject to higher rate income tax, but a larger share of the pre death estate. My assumption is that this would be classed as tax avoidance and therefore not permitted, is my assumption correct ?
Many thanks.
I'm the executor of my late mothers estate and would like to confirm my understanding of how I need to distribute her estate, including income generated after she passed, estate income.
The Will divides the estate into three equal shares and no IHT will be due. However, the estate will generate significant income after death, which will be taxed at 20%. For one of the three beneficiaries, their share of the estate generated income will push them into the higher rate tax bracket, and they will be required to pay a further 20% income tax.
A possible solution may be to distribute less estate generated income to the beneficiary who would be subject to higher rate income tax, but a larger share of the pre death estate. My assumption is that this would be classed as tax avoidance and therefore not permitted, is my assumption correct ?
Many thanks.
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Comments
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The estate of the deceased bears the income tax liability not the individual beneficiaries. A tax return will need to be completed and filed.0
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Hoenir said:The estate of the deceased bears the income tax liability not the individual beneficiaries. A tax return will need to be completed and filed.0
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Bobziz said:Hoenir said:The estate of the deceased bears the income tax liability not the individual beneficiaries. A tax return will need to be completed and filed.
As you will see from the HMRC link below, each time you make a distribution on account of estate income ( less 20% or 8.75% tax depending on income source )
you are required to provide each beneficiary with form r185 which will show the gross, tax and net income to be reported on their respective self assessment tax returns.
If they are non tax payers they can potentially recover all the tax paid on their share. If basic rate tax payers then the 20%/8.75٪ r185 tax credit satisfies their obligations. If the distribution pushes a beneficiary into higher rate tax, then they still receive the 20%/8.75% tax credits with further liabilities thereon to top them up to 40% or 45% .
There are no legal means for the higher rate tax payer to avoid additional income tax on their income share unless of course they are prepared to disclaim their beneficial share of the estate in its entirety or execute a deed of variation diverting their share of the estate to someone else ( rather drastic measures to avoid income tax ).
What you have proposed as a solution would amount to tax evasion ( not tax avoidance ), and therefore illegal.
Depending on how long it will take to wind up the estate, you could of course make interim distributions of estate income each tax year, to avoid a cumulative amount distributed in the final year of winding up the estate.
Given there will be substantial income during the estate administration period and estate tax returns therefore required, hopefully you have access to professional help in preparing the requisite estate accounts detailing all estate capital and income transactions, culminating in the final beneficiary distribution accounts in due course.
https://www.gov.uk/government/publications/trusts-and-estates-statement-of-income-from-estates-r185-estate-income
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Thank you @poseidon1 that's a very comprehensive answer and confirms my understanding apart from the extent to which the proposal is a non-starter.
Thankfully as all of the income is from a single source, the estate return will be simple and therefore no professional help will be required.
I also have a plan b involving gift aid which should reduce the tax liability of the highest income beneficiary. As it will be gifts given by the beneficiaries rather than the estate, it will not be something that I need to act on in my capacity as executor.
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Bobziz said:Thank you @poseidon1 that's a very comprehensive answer and confirms my understanding apart from the extent to which the proposal is a non-starter.
Thankfully as all of the income is from a single source, the estate return will be simple and therefore no professional help will be required.
I also have a plan b involving gift aid which should reduce the tax liability of the highest income beneficiary. As it will be gifts given by the beneficiaries rather than the estate, it will not be something that I need to act on in my capacity as executor.0 -
Keep_pedalling said:Bobziz said:Thank you @poseidon1 that's a very comprehensive answer and confirms my understanding apart from the extent to which the proposal is a non-starter.
Thankfully as all of the income is from a single source, the estate return will be simple and therefore no professional help will be required.
I also have a plan b involving gift aid which should reduce the tax liability of the highest income beneficiary. As it will be gifts given by the beneficiaries rather than the estate, it will not be something that I need to act on in my capacity as executor.0 -
Bobziz said:Keep_pedalling said:Bobziz said:Thank you @poseidon1 that's a very comprehensive answer and confirms my understanding apart from the extent to which the proposal is a non-starter.
Thankfully as all of the income is from a single source, the estate return will be simple and therefore no professional help will be required.
I also have a plan b involving gift aid which should reduce the tax liability of the highest income beneficiary. As it will be gifts given by the beneficiaries rather than the estate, it will not be something that I need to act on in my capacity as executor.0 -
Keep_pedalling said:Bobziz said:Keep_pedalling said:Bobziz said:Thank you @poseidon1 that's a very comprehensive answer and confirms my understanding apart from the extent to which the proposal is a non-starter.
Thankfully as all of the income is from a single source, the estate return will be simple and therefore no professional help will be required.
I also have a plan b involving gift aid which should reduce the tax liability of the highest income beneficiary. As it will be gifts given by the beneficiaries rather than the estate, it will not be something that I need to act on in my capacity as executor.0 -
Bobziz said:Keep_pedalling said:Bobziz said:Keep_pedalling said:Bobziz said:Thank you @poseidon1 that's a very comprehensive answer and confirms my understanding apart from the extent to which the proposal is a non-starter.
Thankfully as all of the income is from a single source, the estate return will be simple and therefore no professional help will be required.
I also have a plan b involving gift aid which should reduce the tax liability of the highest income beneficiary. As it will be gifts given by the beneficiaries rather than the estate, it will not be something that I need to act on in my capacity as executor.1 -
The thing is, the tax positions of the various beneficiaries is their business, not yours as executor.
Your job is to report and distribute. Theirs is to make a true return to HMRC.Signature removed for peace of mind0
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