Tax due on interest accrued on a deceased person's savings account

sneedshelp

Following my Mum passing away and the completion of the probate process, I received a letter from my Mum’s bank last April, saying that they were going to pay me the interest which had accrued on Mum’s savings after her passing, and that I was responsible for declaring that to HMRC for tax purposes.

I wrote to HMRC with the details last May.

On Monday, I received from HMRC my tax code notification with effect from 6 April, but then yesterday, for the first time ever and with no explanation, I received a letter confirming that they would be asking me after 5 April to complete a self assessment tax return.

Does anyone know if that will be specifically because of the aforementioned interest accrued on Mum’s savings, so in other words for some reason HMRC are not able to process the tax on that via the tax code ?

Thanks.

Linton

I dont know the details of how HMRC actually process it, but surely the tax due is payable by the estate, not you personally.  Processing any tax due via your tax code, depending on your tax circumstances, could result in higher rate tax being applied when that may not have been necessary.

There is no tax free allowance for interest received after death - it's a straight 20%.  See here.

Was it clear to HMRC that the the interest was for the deceased and not yourself?  I cant see why it should necessitate you completing self assessment.

sneedshelp

Thanks, yes I made it clear in my letter to them that the interest was in respect of my Mum's account, and that the bank's notification of it to myself was received after the completion of the estate valuation and probate process, with myself being the sole beneficiary.

TheSpectator

Regardless of the notification, when did the interest accrue? If it was during the administration period from date of death until Probate granted then the tax is due by the Estate as stated above.

How much was the interest?

sneedshelp

Thanks, some of it was accrued in the administration period and the 2023/24 tax year, and some of it in the 2024/25 year ( received two separate letters from the bank ). I don't have the figures to hand unfortunately. I had assumed that the tax would be paid by myself, as I knew nothing about it until after the completion of the estate valuation and probate, and I am the sole beneficiary ?

TheSpectator

sneedshelp said:

Thanks, some of it was accrued in the administration period and the 2023/24 tax year, and some of it in the 2024/25 year ( received two separate letters from the bank ). I don't have the figures to hand unfortunately. I had assumed that the tax would be paid by myself, as I knew nothing about it until after the completion of the estate valuation and probate, and I am the sole beneficiary ?

No, you are personally not liable for any tax on interest accruing during the admin period - that is the responsibility of the estate.

Savvy_Sue

TheSpectator said:

sneedshelp said:

Thanks, some of it was accrued in the administration period and the 2023/24 tax year, and some of it in the 2024/25 year ( received two separate letters from the bank ). I don't have the figures to hand unfortunately. I had assumed that the tax would be paid by myself, as I knew nothing about it until after the completion of the estate valuation and probate, and I am the sole beneficiary ?

No, you are personally not liable for any tax on interest accruing during the admin period - that is the responsibility of the estate.

But - genuine question - if you are the sole beneficiary, what's the difference between the beneficiary paying it, and the estate paying it? I am probably being very dense ... 

Linton

Savvy_Sue said:

TheSpectator said:

sneedshelp said:

Thanks, some of it was accrued in the administration period and the 2023/24 tax year, and some of it in the 2024/25 year ( received two separate letters from the bank ). I don't have the figures to hand unfortunately. I had assumed that the tax would be paid by myself, as I knew nothing about it until after the completion of the estate valuation and probate, and I am the sole beneficiary ?

No, you are personally not liable for any tax on interest accruing during the admin period - that is the responsibility of the estate.

But - genuine question - if you are the sole beneficiary, what's the difference between the beneficiary paying it, and the estate paying it? I am probably being very dense ... 

1) The tax due could be different.  The estate does not get a tax allowance and interest is taxed at 20% whereas the individual beneficiary may have a marginal tax rate from 0 to 45%.
2) As an important matter of principle money managed by an executor should be completely separated from their own finances until formally distributed.

sneedshelp

Thanks to all for further comments, I am on a computer in a library so I don't keep up with this everyday.

I have been advised by a member of staff at my own bank that I will need to complete a self assessment return to cover tax on the interest accrued from Mum's savings, because it cannot be processed via the tax code payments.

Runner_Duck

Surely this depends on the value of the estate.
If the value was less than £2.5 million and interest and CGT less than £10,000 then according to HMRC a simple letter is enough.  This page details what information is needed plus how to pay Dealing with the estate of someone who's died: Reporting an estate’s income to HMRC - GOV.UK
The page also tells how to deal with 'Complex' estates where you do need to register and complete a Self Assessment. The estate has a tax free allowance of £500 from income from all sources but as soon as it is >£500 you pay 20% on everything.  It took 21 months but HMRC finally produced the final statement and demanded final payment within 28 days, or else.  We paid by bank transfer.
All of our letters from the HMRC were addressed to 'The Estate of Mrs......' so if your letter with the Tax Code etc is addressed to you personally then it is for you and not your Mum's estate. Welcome to the world of Self Assessment! 

poseidon1

Linton said:

Savvy_Sue said:

TheSpectator said:

sneedshelp said:

Thanks, some of it was accrued in the administration period and the 2023/24 tax year, and some of it in the 2024/25 year ( received two separate letters from the bank ). I don't have the figures to hand unfortunately. I had assumed that the tax would be paid by myself, as I knew nothing about it until after the completion of the estate valuation and probate, and I am the sole beneficiary ?

No, you are personally not liable for any tax on interest accruing during the admin period - that is the responsibility of the estate.

But - genuine question - if you are the sole beneficiary, what's the difference between the beneficiary paying it, and the estate paying it? I am probably being very dense ... 

1) The tax due could be different.  The estate does not get a tax allowance and interest is taxed at 20% whereas the individual beneficiary may have a marginal tax rate from 0 to 45%.
2) As an important matter of principle money managed by an executor should be completely separated from their own finances until formally distributed.

Technically speaking there should be no fundamental difference in a sole estate beneficiary declaring estate income at estate level or personally, except when such income is  at or below £500 ( the estate tax exempt amount), or where such income is allowed to accumulate over different tax years before distribution ( see more about this below).

Tax paid by an estate at 20% would generate a trust tax deduction certificate at that rate, requiring the beneficiary to personally report the same income with the tax credit, in the year of receipt.

Depending on the beneficiary's marginal rate  and remaining level of  personal allowance this could either generate a tax refund or additional tax at the 40% or 45% rates.

Depending on the quantum of estate income being generated, and as a point of tax planning,  it is often best to make interim distributions of income on account, rather than waiting until the end of an estate administration period where this is likely to straddle different tax years.

Estate beneficiaries are taxable on estate income  in the year they receive it rather than the original tax year years it was generated.  Therefore accumulating  large sums of estate income over different tax years before ultimately dustributing can be counter productive from a beneficiary's point of view.

This happens to be one of a number of nuanced estate tax planning points often overlooked by estate administrators.

 This normally is only of real concern to estates generating substantial annual income, but is often overlooked by solicitors administering estates and lay executors operating on a DIY basis. 
That said, there can be occasions where  if this distinction is overlooked or ignored, it can mean the  difference between the beneficiary paying tax at 40%  ( or higher) rather than 20%  purely based on timing of distributions.

It is also as well to note  (counterintuitively ) that a distribution of assets, can be deemed to include income in the year of distribution .  A useful blog on taxation of estate beneficaries in this regard, provided in the link below.

https://legacymanagement.org.uk/topic/the-taxation-of-beneficiaries/#:~:text=During the administration period beneficiaries,to distributions that they receive.