IHT411 accrued interest on gilts

TheGreenFrog

I am filling out an IHT 411 in relation to a deceased relative's estate. That relative had various conventional gilts. I have seen the earlier thread on this subject but got rather confused!

My impression before I read the IHT400 notes is that you would either include the gilt at the dirty price, or at the clean price and list the accrued interest separately (I will gloss over the ex-interest situation). But the IHT400 notes imply that you should quote clean price and then take basic rate tax off the accrued interest figure. Why I have no idea. Is this correct?

And if it is correct what happens with the deceased's income tax return for the year of death? I had assumed that interest accrued to date of death would be brought into the income tax charge (and therefore that accrued income would be credited for the purposes of calculating income tax on the estate post date of death), and that the income tax charge is a liability of the estate. If so there would appear to be potential for a double deduction for taxation. But maybe the accrued income scheme does not apply on death?

poseidon1

OP your question ( surprisingly) rarely arises on this forum, given the increasing popularity of unwrapped gilt investing,

The position is that accrued income at death is not liable to tax on the deceased's personal tax return since death is not a taxable event for the purposes of the accrued income scheme ( AIS).

As regards reporting for IHT purposes, basic rate tax is deducted from the gross accrued income to mitigate the 40% IHT that might arise thereon and because the accrued income when it materialises into actual taxable interest received in the executors hands, is fully liable to basic rate tax for the purposes of estate administration tax compliance. This remains the case even if the interest ultimately proves non taxable as falling within the £500 de minimis threshold.

However, I would observe that this basic rate deduction is a little anomalous and akin to an HMRC concession which a small contingent of estate tax professionals are wont to disagree, but the majority of professionals have been applying this relief to estates for many decades - see the debate in a trust discussion forum below -

https://trustsdiscussionforum.co.uk/t/accrued-income-up-to-date-of-death/16415/5

Also bear in mind that there is no accrued Income assessable or reportable for IHT purposes or generally, where the nominal face value of the security is at or below £5,000 - see below

https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim4210

TheGreenFrog

That is very interesting, thank you. So I also deduct basic rate tax from ISA accrued gilt income as well (the notes make no distinction) and for the estate tax return there is no accrued income credit for purchases made by deceased where first interest payment is after death?

Also, the deceased's broker (Hargreaves Lansdown) has sent a valuation which shows the gilt at the clean price and "interest due" as zero (although no interest is due there is accrued interest): from my reading of the IHT400 notes I need to report the accrued interest and not the "interest due".

silvercar

I’m following this thread. I can move to the cutting tax board if you wish. I’ve seen comments about the tax treatment of gilts over there.

TheGreenFrog

I don't know which is best place, so don't mind where it goes.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82091023#Comment_82091023

My response assumed the accrued interest in question was from an unwrapped holding of gilts where the interest ultimately receivable would be liable to income tax.

There seems to be no specific clarification with regard to accrued interest at ISA level, but instinctively from my professional perspective, since the actual interest receivable would be wholly tax free in the hands of the deceased ISA holder, and equally tax free in the hands of the executors ( for up to 3 years after death), there is no basic rate tax deduction on accrued interest at death in this circumstance since there is no scope for double tax ( beyond IHT) on the accrual.

As far as the deceased personal tax return to date of death is concerned, the accrued income scheme does not apply at all to interest bearing securities held at ISA level.

Worth noting HMRC's practice directions ( below) when considering accrued income at death and especially their observation that executors can mistakenly believe ISA accrued income is IHT exempt -

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm10071

TheGreenFrog

"As far as the deceased personal tax return to date of death is concerned, the accrued income scheme does not apply at all to interest bearing securities held at ISA level."

But I think you are also saying that an accrued income credit arising before death (e.g. buy gilt a week before death with interest payment date a week after death) is not available to set against interest received after death?

Notepad_Phil

https://forums.moneysavingexpert.com/discussion/comment/82091023#Comment_82091023

Also, the deceased's broker (Hargreaves Lansdown) has sent a valuation which shows the gilt at the clean price and "interest due" as zero

I assume you requested a valuation for inheritance tax purposes, in which case it seems that HL has provided information that for most people, who aren't in on the intricacies of clean/dirty prices etc, would result in them unknowingly understating an estate's value.

TheGreenFrog

https://forums.moneysavingexpert.com/discussion/comment/82092850#Comment_82092850

My feeling exactly. I queried it with them and they responded as follows:

The Gilts are all on fixed term interest, so the interest does not get applied to the accounts until the maturity dates. Therefore the valuations provided are accurate at the time of death.

I don't even want to think how they value index-linked gilts where difference between clean and dirty is often massive.