Will / trust

Skint_yet_Again

Thank you @probate_slave you are correct I am hoping not to have to complete an iht return but still look at the forms. Didn’t see the guidance. 

poseidon1

Skint_yet_Again said:

IHT406 says include cash ISA’s and interest? 

Can you link me to guidance to back up not to include it? Please don’t be offended but I try to make sure I back up advice received before following it and I can’t find anything about accrued isa interest 

You are correct, ISA accrued income at death  is not exempt from being accounted for IHT purposes.

 However, since the estate value  appears to be comfortably within the 'excepted estate' criteria, can't imagine the ISA accrued interest will effect that outcome.

Keep_pedalling

Apologies, I had a senior moment and misread the question and was looking at income tax rather than IHT. Yes you have to calculate the interest up to the date of death and include that on the IHT return. You can however ignore it for IT purposes when the interest is actually paid.

I also believe that you can deduct 20% of the interest from non ISA accounts on the IHT return to prevent double taxation as IT will be payable on that interest by the estate.

mybestattempt

I also believe that you can deduct 20% of the interest from non ISA accounts on the IHT return to prevent double taxation as IT will be payable on that interest by the estate.

I'm not sure why you think that. 

The taxable interest arising in the period from the preceding 6th April up to the date of death is income of the deceased (not the estate) and should included in the calculation of the deceased's income tax liability up to date of death for the tax year in which they died.

IHT is charged on the value of the estate at the date of death, it is not a tax on income. The IHT return requires the value of all saving accounts at the date of death. The IHT 400 notes explain that the bank will advise on interest accrued up to date of death to establish the value of the account.

Taxable interest arising after the date of death during the period of administration is income of the estate and is included in the calculation of the liability (of the executor) of the estate to income tax.

These links explain the position:

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem7262

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem7356

poseidon1

mybestattempt said:

I also believe that you can deduct 20% of the interest from non ISA accounts on the IHT return to prevent double taxation as IT will be payable on that interest by the estate.

I'm not sure why you think that. 

The taxable interest arising in the period from the preceding 6th April up to the date of death is income of the deceased (not the estate) and should included in the calculation of the deceased's income tax liability up to date of death for the tax year in which they died.

IHT is charged on the value of the estate at the date of death, it is not a tax on income. The IHT return requires the value of all saving accounts at the date of death which will normally be the balance of the account at the date of death.

Taxable interest arising after the date of death during the period of administration is income of the estate and is included in the calculation of the liability (of the executor) of the estate to income tax.

These links explain the position:

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem7262

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem7356

Accrued income ( interest and  ex divs) at date of death have not by definition been received by the deceased prior to death.

 It is a very longstanding and accepted practice to deduct basic rate tax from accrued interest, as well as the lowest dividend rate of tax from ex divs, in arriving at the taxable accrued income for IHT purposes. This is to mitigate against income tax on the same income once it is later  received in the estate and subject to tax therein.

 This is the case even where the income might avoid estate tax if falling within the £500 de minimis in the subsequent tax year.

Sadly, this is no longer made clear in the HMRC notes to IHT 400  ( so no longer visible to DIY estate administrators ) but nonetheless remains a practice followed by professional estate administrators.

EDIT:

A useful exchange on this point in the STEP Trust discussion forum - below

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

mybestattempt

poseidon1 said:

mybestattempt said:

I also believe that you can deduct 20% of the interest from non ISA accounts on the IHT return to prevent double taxation as IT will be payable on that interest by the estate.

I'm not sure why you think that. 

The taxable interest arising in the period from the preceding 6th April up to the date of death is income of the deceased (not the estate) and should included in the calculation of the deceased's income tax liability up to date of death for the tax year in which they died.

IHT is charged on the value of the estate at the date of death, it is not a tax on income. The IHT return requires the value of all saving accounts at the date of death which will normally be the balance of the account at the date of death.

Taxable interest arising after the date of death during the period of administration is income of the estate and is included in the calculation of the liability (of the executor) of the estate to income tax.

These links explain the position:

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem7262

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem7356

Accrued income ( interest and  ex divs) at date of death have not by definition been received by the deceased prior to death.

 It is a very longstanding and accepted practice to deduct basic rate tax from accrued interest, as well as the lowest dividend rate of tax from ex divs, in arriving at the taxable accrued income for IHT purposes. This is to mitigate against income tax on the same income once it is later  received in the estate and subject to tax therein.

 This is the case even where the income might avoid estate tax if falling within the £500 de minimis in the subsequent tax year.

Sadly, this is no longer made clear in the HMRC notes to IHT 400  ( so no longer visible to DIY estate administrators ) but nonetheless remains a practice followed by professional estate administrators.

EDIT:

A useful exchange on this point in the STEP Trust discussion forum - below

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

There are of course differing opinions in that discussion. 

The value of an estate may well include accrued interest but when non-ISA interest is actually paid/credited during the period of administration it is chargeable to income tax.

While there is nothing in either the relevant legislation or official HMRC guidance which endorses the practice (of adjusting the true value of the estate) which you describe I will follow the guidance.

Skint_yet_Again

Thank you all for your input. So if I have this correct I include gross accrued isa interest in my IHT calcs (still no IHT due) and it is also treated as income of the estate when paid so income tax will be due on the estate and I will need to do an estate tax return ? May need your  help with which tax return! Haven’t even looked at the estate yet. EDIT / or does ISA interest remain tax free ?

Otherwise non isa gross interest paid up to date of death (only £75) is part of IHT and income tax to date of death calcs (& will be covered by PSA for income tax purposes)

There will be more interest to the estate as it’s too soon to close them all into executor bank account due to total exceeding fscs £85000. Am I right in thinking this is due to increase from  Dec to £110k. I know there is an increased one time balance of £1m but only for 6 months and it may take longer to sell house and split proceeds/ total estate. I may start closing some of the smaller ones who don’t require probate. 

Just for background the reason this question came up is because all ISA’s reported accrued interest apart from co op who only reported the capital. When I rang them the bereavement team seemed woefully unaware and said they have only one person who can calculate accrued interest to date of death and they will send me a letter with the figure! 

mybestattempt

Skint_yet_Again said:

Thank you all for your input. So if I have this correct I include gross accrued isa interest in my IHT calcs (still no IHT due) and it is also treated as income of the estate when paid so income tax will be due on the estate and I will need to do an estate tax return ? May need your  help with which tax return! Haven’t even looked at the estate yet. 

Otherwise non isa gross interest paid up to date of death (only £75) is part of IHT and income tax to date of death calcs (& will be covered by PSA for income tax purposes)

There will be more interest to the estate as it’s too soon to close them all into executor bank account due to total exceeding fscs £85000. Am I right in thinking this is due to increase from  Dec to £110k. I know there is an increased one time balance of £1m but only for 6 months and it may take longer to sell house and split proceeds/ total estate. I may start closing some of the smaller ones who don’t require probate. 

Just for background the reason this question came up is because all ISA’s reported accrued interest apart from co op who only reported the capital. When I rang them the bereavement team seemed woefully unaware and said they have only one person who can calculate accrued interest to date of death and they will send me a letter with the figure! 

For the deceased's liability to date of death non-ISA interest already  paid/credited  from 6 April 2025 is included in the calculation of the deceased's liability to income tax and the personal savings allowance applied.


All accrued ISA and non- ISA interest is included to calculate the value of the estate at date of death for inheritance tax purposes. 


ISA interest paid/credited after the date of death it is not chargeable to income tax (for three years) so is not included in the calculation of taxable income of the estate. 


ISA interest does not feature in the income tax calculations.

However, inheritance tax is a tax on the value of an estate at the date of death and the value of both non-ISA and ISA (which includes accrued interest) accounts is included.

You may not need to file a tax return for the administration period, it maybe that the income tax liability can be dealt with informally if it needs to be reported.

These links explains:

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem7410

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem7413

Skint_yet_Again

Thank you so much @mybestattempt that is really clear now. 

Could anyone tell me how do I treat refunds from
1. road tax (to date of death) car was off road
2. BT (returned part of monthly direct debit when cancelled to date of death) and
3. house insurance (paid annually before death) they cancelled accidental damage cover after property no longer occupied after death).?

As always I am grateful for any help. 

probate_slave

Skint_yet_Again said:

Could anyone tell me how do I treat refunds from
1. road tax (to date of death) car was off road
2. BT (returned part of monthly direct debit when cancelled to date of death) and
3. house insurance (paid annually before death) they cancelled accidental damage cover after property no longer occupied after death).?

I would say that refunds 1 and 2 should both be added to the value of the gross estate, while 3 is just cash for the administrators since it arises from a change post death.
If you are looking for confirmation in the IHT400 notes you can find it at page 50, box 76 of the latest edition.