Post-death income on fixed term accounts

mark1956

I am the executor of my mother's will. IHT has been paid and accepted by HMRC.
The estate had eight fixed-term accounts in my mothers name. All have been transferred to the six beneficiaries. The accrued interest on these accounts is paid out only on closure or maturity, not on death or transfer. Therefore the accrued interest between DoD and the transfers has not been credited to the accounts. It seems logical to me that the estate is liable for income tax on the accrued interest between DoD and transfer, and the recipients are liable for the subsequent tax on the accrued interest. Therefore my plan was to get statements of the accrued interest between DoD and transfer from the eight providers and declare this to HMRC. The total interest will give rise to a <£3k tax bill (at 20%), there is more than enough cash left in the estate to pay this. My concern is that when the accounts mature and the interest is paid out, HMRC will try to tax the new owners on the whole payment, not just the proportion accrued after the transfers. Any advice - am I doing this correctly?

poseidon1

I do not believe this will work, since you state all the accounts are now personally owned by the underlying beneficiaries, prior to interest being paid out. If you wanted to shelter the maturing interest receipts within the 20% estate income tax rate, the transfers to the beneficiaries should not have occurred until after maturity.

Despite accrued interest to date of death  being calculated and potentially assessable for IHT purposes, there is no such equivalent excercise available for splitting post death interest receivable between estate and beneficiaries. It is either wholly the beneficiaries ( if transferred prior to maturity) or entirely the estate.

In any event, there should be no difference to the beneficiaries' personal tax outcomes, since any income taxed in the estate, would eventually  have been attributed to the beneficiaries when the resulting net income is paid out to them.  You would have been required to prepare 6 separate estate tax deduction certificates ( form R185 ) recording the interest amounts received by the estate and the tax paid thereon. The beneficiaries,  in turn , would then have to submit those same certificates to HMRC either to obtain tax refunds ( if non tax payers ) or potential 40% tax with credit for 20% paid by the estate.

By transferring accounts the way you did, at least those maturing account interest will be taxed ( or not ) directly on the beneficiaries, without your intervention as executor ( simplifying your job).

That said, you indicate that you still retain some cash in the estate. If that has been generating any interest then you do have a reporting obligation and estate tax to pay on that amount with form R 185s potentially in point when you distribute the remaining cash to the beneficiaries. If that cash is non interest bearing then all good, no further work for you!

I assume you have been  flying solo with regard to tax compliance for the estate and have not had professional advice in this regard?

Keep_pedalling

I don’t think your logic is correct, I am pretty sure the tax falls on the beneficiaries, but I stand to be corrected on that.

mark1956

poseidon1 said:

I do not believe this will work, since you state all the accounts are now personally owned by the underlying beneficiaries, prior to interest being paid out. If you wanted to shelter the maturing interest receipts within the 20% estate income tax rate, the transfers to the beneficiaries should not have occurred until after maturity.

Despite accrued interest to date of death  being calculated and potentially assessable for IHT purposes, there is no such equivalent excercise available for splitting post death interest receivable between estate and beneficiaries. It is either wholly the beneficiaries ( if transferred prior to maturity) or entirely the estate.

In any event, there should be no difference to the beneficiaries' personal tax outcomes, since any income taxed in the estate, would eventually  have been attributed to the beneficiaries when the resulting net income is paid out to them.  You would have been required to prepare 6 separate estate tax deduction certificates ( form R185 ) recording the interest amounts received by the estate and the tax paid thereon. The beneficiaries,  in turn , would then have to submit those same certificates to HMRC either to obtain tax refunds ( if non tax payers ) or potential 40% tax with credit for 20% paid by the estate.

By transferring accounts the way you did, at least those maturing account interest will be taxed ( or not ) directly on the beneficiaries, without your intervention as executor ( simplifying your job).

That said, you indicate that you still retain some cash in the estate. If that has been generating any interest then you do have a reporting obligation and estate tax to pay on that amount with form R 185s potentially in point when you distribute the remaining cash to the beneficiaries. If that cash is non interest bearing then all good, no further work for you!

I assume you have been  flying solo with regard to tax compliance for the estate and have not had professional advice in this regard?

Thanks. You correctly guessed that I'm flying solo! It looks as thought what I have done is for the best (fortuitously) - two of the beneficiaries are not taxpayers, and I wont need to issue any R185 forms on the fixed term accounts. Just leaves the remaining cash to deal with.