Deed of Variation and form R185 to beneficiaries

jem16

Just wanting to get my head around the tax paid by the estate so I can pass on the relevant information to the beneficiaries.

My two sons were due pecuniary legacies from their grandfather’s Will and received those. However I also used a Deed of Variation to divert some of my share as a residual beneficiary to my sons. Does that then make them also residual beneficiaries and do I now need to work out their share of interest/dividends and tax due to the estate?

One is in Canada so presumably needs to check how it’s entered on his tax return?

poseidon1

Yes they will indeed require their own R185s for their individual shares of the residuary income.

Remember however, that the R185s should reflect actual distributions ( capital or income ) in the tax year they actually occured.

Where there is significant income accruing each estate administration year, but there are no interim distributions ( of whatever nature ) in prior years, all that accumulated income becomes R185 reportable in one lump when estate distributions eventually occur.

In some cases this could push some beneficiaries who would otherwise be 20% ( UK) tax payers into higher rate in the year they eventually receive their shares of residue. This is an aspect often overlooked by DIY executors, and not greatly appreciated by many solicitors handling estate administration.

As for your Candian tax resident son, he may need to take advice on the Canadian tax implications of the estate income diverted in his favour. However under the appropriate double tax agreements, the UK tax credit should be available to him to offset any additional Canadian income tax assessable thereon.

jem16

Thanks. So now I need to work out the percentages for me and my sons. My brother is a straightforward half.

All beneficiaries are already higher rate taxpayers although one in the Advanced Rate band. The estate tax has been paid - will extra tax be due for the beneficiaries?

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81904987#Comment_81904987

Even though they are already higher rate tax payers, the R185s will only come with 20% and 8.75% tax credits, so they will each have additional tax to pay on their shares of the estate income at their highest marginal rates.

RAS

What would the implications be if some of the residual diversion was paid out in this tax year, and some in the next tax year?

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81905065#Comment_81905065

The distribution ( if large enough ) would exhaust all reportable and undistributed estate income to the end of this tax year, leaving only the new tax year of income to match that year's distribution.

If only a very modest cash distribution and less than the undistributed estate income so far, than that undistributed income balance gets carried forward into the new tax year to be 'franked' for R185 purposes against that year's distributions and any other income arising in the year.

Because of this potential mismatch between income reportable for R185 purposes, and estate income actually arising in each tax year, it is important that this can be visibly seen on the income account of the formally prepared estate accounts so that the affected beneficiaries can understand why there appears to be a discrepancy with their R185.

Sadly not an accounting excercise many DIY executors will be familiar with, and again often overlooked by solicitors.