Estate tax and foreign tax credit relief

probate_slave

Might someone know the procedure for an executor claiming FTCR for foreign dividends on a deceased UK estate, and how it relates to R185 and SA107? This must be a common scenario, but the only guidance I found so far was a cryptic paragraph at TSEM7453 (see below).

The estate received foreign dividends from multiple countries net of foreign tax at various rates (with all countries covered by DTAs restricting dividend tax to 15%). The notes to SA904 (Trust & Estate Foreign) suggest I have to choose between claiming FTCR for the estate, which would clearly be capped at 8.75%, or claiming the foreign tax as a deduction. Intuitively the beneficiaries, as higher rate taxpayers, should be entitled to 15% relief on the gross dividends, but I don't see the mechanism to enable them to recover the balance.

Or should the estate ignore foreign tax completely, and allow the beneficiaries to claim the 15% FTCR on their own SA106 foreign pages, assuming I give them full details of the foreign dividends? Or can both happen, ie the estate benefits from 8.75% FTCR and the beneficiaries from 15%?  Is that what is meant by TSEM7453?

"The PRs sort out any issues settling tax with foreign tax credits  and the applicable rate does not carry any character. For the purpose of beneficiary grossing and credits, it does not matter whether any amount payable by the PRs is settled by way of non-repayable tax credits.  The full grossing and credit is available to the beneficiary and may be repaid where appropriate."

In case it's relevant, no payments of income were made in the year to residuary beneficiaries, only sufficiently large payments of capital that are deemed income in the beneficiaries' hands.

poseidon1

probate_slave said:

Might someone know the procedure for an executor claiming FTCR for foreign dividends on a deceased UK estate, and how it relates to R185 and SA107? This must be a common scenario, but the only guidance I found so far was a cryptic paragraph at TSEM7453 (see below).

The estate received foreign dividends from multiple countries net of foreign tax at various rates (with all countries covered by DTAs restricting dividend tax to 15%). The notes to SA904 (Trust & Estate Foreign) suggest I have to choose between claiming FTCR for the estate, which would clearly be capped at 8.75%, or claiming the foreign tax as a deduction. Intuitively the beneficiaries, as higher rate taxpayers, should be entitled to 15% relief on the gross dividends, but I don't see the mechanism to enable them to recover the balance.

Or should the estate ignore foreign tax completely, and allow the beneficiaries to claim the 15% FTCR on their own SA106 foreign pages, assuming I give them full details of the foreign dividends? Or can both happen, ie the estate benefits from 8.75% FTCR and the beneficiaries from 15%?  Is that what is meant by TSEM7453?

"The PRs sort out any issues settling tax with foreign tax credits  and the applicable rate does not carry any character. For the purpose of beneficiary grossing and credits, it does not matter whether any amount payable by the PRs is settled by way of non-repayable tax credits.  The full grossing and credit is available to the beneficiary and may be repaid where appropriate."

In case it's relevant, no payments of income were made in the year to residuary beneficiaries, only sufficiently large payments of capital that are deemed income in the beneficiaries' hands.

Faced with your predicament and assuming you do not wish to delegate this task to a Chartered Accountant, I would invest a small amount in proprietary trust tax software to assist in both the preparation of the foreign dividend pages, together with the facility to automatically produce the beneficiaries R185 therefrom - see link below as an example ( as used by professionals) - 

https://www.taxcalc.com/trust#Features

As far as the R 185s are concerned, you should  note they should coincide with actual distributions to the beneficiaries during  the tax year concerned. So if we were talking about the 2024/25 tax year  there has to be actual  distributions to beneficiaries  in that year, which can be matched to estate income reportable to HMRC. This is an important planning point for estates that generate significant income during the administration period.

probate_slave

Thank you for your reply @poseidon1. I was planning to use Andica software both for SA900 and my own SA100, but will give TaxCalc a try. In my two experiences with accountants, both wanted far more detail than HMRC ever ask for, made horrendous mistakes which took a lot of unravelling, and charged ludicrous sums for entering a few figures into their software. So I have always done my own returns and have no difficulty understanding and calculating FTCR for my personal tax.

My problem here is legislative. Is there anyone who understands what is meant by the paragraph from TSEM7453 quoted above? Or whether the beneficiaries are in fact entitled to the full 15% FTCR if the estate has already claimed 8.75%? Is box 24 on R185 (Foreign tax for which FTCR has not been claimed) relevant at all?

On your last point, the R185s will certainly match the estate income reported on SA900. But it will not be because the beneficiaries received distributions of income (they received none), rather that they received capital assets which exceeded their "income entitlement" for the year.

probate_slave

I feel I should conclude this for any administrator searching in future, though dividend rates will of course soon be rising. I believe the answer, once the estate has claimed 8.75% relief, is for beneficiaries to claim the remaining 6.25% on their own Foreign pages. To do this they need to report their share of gross foreign income on F2 & F3, along with amounts of unclaimed foreign tax and UK tax deducted. (Naturally this income isn't included with the other dividends at box 18 of R185.) Box 24 of R185 can be used to show the available FTCR, but beneficiaries should be advised to add this amount to box 2 of SA106 as a relief against tax, rather than box 24 of SA107 as a relief against income.

I eventually remembered an inspector telling me in 2012 (as administrator) to declare all estate foreign income on the beneficiary's tax return rather than the estate return. This would simplify the FTCR claim and produce the same revenue, but doesn't seem to be an option on SA904.

My fellow beneficiaries, unfamiliar with both foreign income and estate income, needed quite a lot of help to submit their own SA returns, particularly with the added complication of s.669 relief.

TaxCalc software is very impressive. Thank you for the recommendation, Poseidon. However, their inexpensive SA900 at £52 doesn't in fact generate R185s automatically: you have to do that yourself by hand. Perhaps the £234 unlimited version can do it, though I rather doubt it given the problem above.

poseidon1

probate_slave said:

I feel I should conclude this for any administrator searching in future, though dividend rates will of course soon be rising. I believe the answer, once the estate has claimed 8.75% relief, is for beneficiaries to claim the remaining 6.25% on their own Foreign pages. To do this they need to report their share of gross foreign income on F2 & F3, along with amounts of unclaimed foreign tax and UK tax deducted. (Naturally this income isn't included with the other dividends at box 18 of R185.) Box 24 of R185 can be used to show the available FTCR, but beneficiaries should be advised to add this amount to box 2 of SA106 as a relief against tax, rather than box 24 of SA107 as a relief against income.

I eventually remembered an inspector telling me in 2012 (as administrator) to declare all estate foreign income on the beneficiary's tax return rather than the estate return. This would simplify the FTCR claim and produce the same revenue, but doesn't seem to be an option on SA904.

My fellow beneficiaries, unfamiliar with both foreign income and estate income, needed quite a lot of help to submit their own SA returns, particularly with the added complication of s.669 relief.

TaxCalc software is very impressive. Thank you for the recommendation, Poseidon. However, their inexpensive SA900 at £52 doesn't in fact generate R185s automatically: you have to do that yourself by hand. Perhaps the £234 unlimited version can do it, though I rather doubt it given the problem above.

My apologies on the Taxcalc suggestion for automatic production of the ancillary R185s. Seems this is only a feature of the unlimited version ( at higher cost) as indicated  below - 

https://www.taxcalc.com/tax#Versions


EDIT

On further investigation appears only software targeted at professionals have this automated r185 production facility. It is as well you had the competency to do this yourself manually given the complexity of the estate foreign income you were dealing with.

For other DIY executors faced with similar challenges, I would have to suggest recourse to a Chartered Accountancy firm specialising in trust and estate tax compliance. I think you would agree that it will be a very rare OP visiting this forum for guidance that would be able to do what you did.