Double Taxation

Olly78

I declared all of the interest accruals on my mothers bank accounts at the time of her death for IHT purposes. They were part of her assets and were therefore contributed to the IHT bill at 40% rate. Since her death that Interest has now been paid to her accounts. I presume that they will be subject to Income tax now post mortem. These interest amounts would effectively be doubly taxed. Can any of the Income tax be offset against a proportion of the IHT paid?

JGB1955

Tax will only be due on any interest accrued after date of death.  The first £500 of interest received by the estate will be taxed at 0%

JamesRobinson48

JGB1955 said:

Tax will only be due on any interest accrued after date of death.  The first £500 of interest received by the estate will be taxed at 0%

Please, do you know of any authoritative source for this statement? 

As far as I know, generally bank interest is subject to income tax based on the full amount credited to a bank account within the respective tax year, without consideration of any accruals or time apportionment. 

Moreover, in your opinion, is interest income accrued (but not yet credited) up to the date of death subject to income tax in anyone's hands, or is it subject only to IHT (which as you know doesn't affect most estates)?

Doubtless OP's query has come up on here many times over the years, but I cannot recall seeing a definitive answer. So thanks in advance for expert insights.

poseidon1

JGB1955 said:

Tax will only be due on any interest accrued after date of death.  The first £500 of interest received by the estate will be taxed at 0%

That is an incorrect understanding of the £500 estate income tax threshold - see HMRC link below

https://www.gov.uk/probate-estate/reporting-the-estate

The correct position is if all estate income is below £500, there is nothing to report. However if all estate income exceeds £500 the entirety is taxable at the relevant estate tax rates. There is no 0% £500 tax band as such.

Either all taxable or none is taxable either side of the £500 threshold.

JGB1955

poseidon1 said:

JGB1955 said:

Tax will only be due on any interest accrued after date of death.  The first £500 of interest received by the estate will be taxed at 0%

That is an incorrect understanding of the £500 estate income tax threshold - see HMRC link below

https://www.gov.uk/probate-estate/reporting-the-estate

The correct position is if all estate income is below £500, there is nothing to report. However if all estate income exceeds £500 the entirety is taxable at the relevant estate tax rates. There is no 0% £500 tax band as such.

Either all taxable or none is taxable either side of the £500 threshold.

Thank you - that makes total sense.

poseidon1

JamesRobinson48 said:

JGB1955 said:

Tax will only be due on any interest accrued after date of death.  The first £500 of interest received by the estate will be taxed at 0%

Please, do you know of any authoritative source for this statement? 

As far as I know, generally bank interest is subject to income tax based on the full amount credited to a bank account within the respective tax year, without consideration of any accruals or time apportionment. 

Moreover, in your opinion, is interest income accrued (but not yet credited) up to the date of death subject to income tax in anyone's hands, or is it subject only to IHT (which as you know doesn't affect most estates)?

Doubtless OP's query has come up on here many times over the years, but I cannot recall seeing a definitive answer. So thanks in advance for expert insights.

You might think the OP's query  on how to  deal with accrued income on death and subsequently during estate admin period , would arise reasonably frequently. 

 That is  not  what I have observed on this forum, which does make me wonder how ( if at all) those who deal with estates on a DIY basis have been addressing the potential for double tax on the accrued income ( IHT and income tax).

I attach for your perusal a trust discussion on this subject, amongst certain  leading trust/estate professionals a few years back. 

https://trustsdiscussionforum.co.uk/t/accrued-income-up-to-date-of-death/16415/15

You will note apart from one dissenter ( Malcolm Finney), prepondance of opinion is to deduct tax at basic rate from the accrued interest and inserting the net figure on the IHT return to partly address the double tax issue. Certainly, I can confirm that was my professional approach when dealing  with many deceased estates  for decades prior to my retirement.

I suspect the OP would not have been aware of this 'relief' when  dealing with the original IHT reporting since HMRC are no long clear about this in the explanatory notes accompany the IHT return.  One tends to only have knowledge of this relief as a professional practitioner of many years standing.

As to the specific question asked by the OP, there is no offset of the 40% IHT ( partly or wholly) on accrued income, when the accrual later becomes liable to income  tax when eventually received by the PR.