Learning Outcomes
After studying this article, you will be able to explain when and how personal representatives are liable for Income Tax and Capital Gains Tax during estate administration. You will understand the main sources of taxable income and chargeable gains, the calculation and reporting of tax liabilities, and the statutory duties of personal representatives in relation to HMRC. You will also be able to apply these principles to SQE1-style scenarios.
SQE1 Syllabus
For SQE1, you are required to understand the tax obligations of personal representatives during the administration of an estate. In your revision, focus on:
- the liability of personal representatives for Income Tax on estate income arising during administration
- the liability of personal representatives for Capital Gains Tax on disposals of estate assets
- the calculation and reporting of tax liabilities for the estate
- the distinction between the deceased’s pre-death tax affairs and the estate’s tax position during administration
- the practical steps required to comply with tax obligations before distributing assets to beneficiaries
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What types of income are personal representatives required to report and pay Income Tax on during estate administration?
- When does Capital Gains Tax arise for personal representatives, and how is the gain calculated?
- Are personal representatives entitled to a personal allowance when calculating Income Tax for the estate?
- What is the annual exempt amount for Capital Gains Tax, and how does it apply to estates?
- What are the main steps personal representatives must take to ensure compliance with HMRC before distributing the estate?
Introduction
When a person dies, their estate may continue to generate income and may also realise gains on the disposal of assets before distribution to beneficiaries. Personal representatives—executors or administrators—are legally responsible for managing the estate’s tax affairs during the administration period. This article explains the key rules on Income Tax and Capital Gains Tax liability for personal representatives, including calculation, reporting, and compliance requirements for the SQE1 exam.
Personal Representatives and Estate Taxation
Personal representatives must deal with all tax liabilities arising during the administration period. The estate is treated as a separate taxable entity for Income Tax and Capital Gains Tax purposes.
Key Term: personal representative
A person appointed to administer a deceased’s estate—either as executor (named in a will) or administrator (appointed under intestacy rules).Key Term: administration period
The period between the date of death and the completion of the estate’s administration, during which the personal representatives manage the estate and settle all liabilities.
Income Tax Liability During Estate Administration
Taxable Income of the Estate
During the administration period, the estate may receive income from:
- interest on bank or building society accounts
- rental income from property
- dividends from shares
- business or trading income (if the deceased’s business continues temporarily)
- other investment income
Personal representatives are responsible for reporting and paying Income Tax on all income arising during the administration period.
Key Term: estate income
Income received by the estate after the date of death and before completion of administration.
Tax Rates and Allowances
Income Tax on estate income is charged at the basic rate (currently 20%) for most types of income, and at the dividend ordinary rate (currently 7.5%) for dividends. Personal representatives do not receive a personal allowance for the estate.
Key Term: personal allowance
The amount of income an individual can receive each tax year without paying Income Tax. Estates do not benefit from a personal allowance.
Calculation and Reporting
Personal representatives must:
- identify all sources of estate income
- calculate the tax due at the correct rates
- pay the tax to HMRC, usually by 31 January following the end of the tax year
- provide beneficiaries with a statement of income and tax deducted if income is distributed
If the estate is small and the tax due is below HMRC’s threshold, an informal payment arrangement may be used. For larger or more complex estates, a self-assessment tax return is required.
Worked Example 1.1
Scenario:
An estate receives £1,200 interest from a savings account and £2,800 rental income during the administration period. What tax must the personal representatives pay?
Answer:
Interest: £1,200 × 20% = £240
Rental income: £2,800 × 20% = £560
Total Income Tax due: £240 + £560 = £800
Distribution to Beneficiaries
When income is paid to beneficiaries, it is treated as received net of tax. Beneficiaries may need to declare this income on their own tax returns and can claim a tax credit for the tax already paid by the estate.
Capital Gains Tax Liability During Estate Administration
Chargeable Gains
If personal representatives sell or otherwise dispose of estate assets (such as property, shares, or valuable chattels) during the administration period, Capital Gains Tax (CGT) may arise on any gain.
Key Term: chargeable gain
The profit made on the disposal of a chargeable asset, calculated as the difference between the sale proceeds and the acquisition cost (usually the market value at the date of death).
Calculation of Gains
For CGT purposes, the acquisition cost of an asset is its market value at the date of death. The gain is calculated as:
Sale proceeds – Value at date of death = Chargeable gain
Personal representatives are entitled to the annual exempt amount for CGT for the tax year of death and the following two tax years.
Key Term: annual exempt amount
The amount of chargeable gains an individual or estate can realise each tax year without paying CGT.
CGT Rates
CGT is charged at 20% for most assets and 28% for gains on residential property. The annual exempt amount for estates is currently £6,150 (half the individual allowance).
Worked Example 1.2
Scenario:
The estate includes a painting valued at £10,000 at death. The personal representatives sell it for £15,000 during administration. What is the CGT liability, assuming the annual exempt amount is £6,150?
Answer:
Gain: £15,000 – £10,000 = £5,000
As the gain is less than the annual exempt amount, no CGT is due.
Reporting and Payment
Personal representatives must report disposals and pay any CGT due by 31 January following the end of the tax year. For residential property, CGT must be reported and paid within 60 days of completion.
Duties and Compliance
Personal representatives must:
- keep accurate records of all income and disposals
- file tax returns and pay tax due before distributing the estate
- provide beneficiaries with statements of income and tax paid
Failure to comply may result in personal liability for unpaid tax and possible penalties.
Worked Example 1.3
Scenario:
An estate receives £4,000 in dividends and £2,000 in interest. The personal representatives distribute £3,000 to a beneficiary. What information must they provide to the beneficiary?
Answer:
They must provide a statement showing the amount paid, the type of income, and the tax deducted (e.g., £3,000 net of tax at 7.5% for dividends or 20% for interest). The beneficiary can use this information to claim a tax credit on their own tax return.
Special Considerations
International Assets and Double Taxation
If the estate includes foreign assets, personal representatives must consider whether income or gains are also taxable abroad. Double taxation agreements may provide relief to avoid the same income or gain being taxed twice.
Anti-Avoidance
Personal representatives must avoid arrangements that could be challenged as tax avoidance. Transactions must be at arm’s length and comply with statutory requirements.
Key Point Checklist
This article has covered the following key knowledge points:
- Personal representatives are responsible for Income Tax and Capital Gains Tax on estate income and gains during administration.
- Estate income is taxed at basic rates, with no personal allowance for the estate.
- Personal representatives are entitled to the annual exempt amount for CGT for the year of death and the next two years.
- Accurate calculation, reporting, and payment of tax to HMRC is required before distributing the estate.
- Beneficiaries must be provided with statements of income and tax paid on distributions.
- Special rules apply for foreign assets and double taxation.
- Personal representatives may be personally liable for unpaid tax if they fail to comply with their duties.
Key Terms and Concepts
- personal representative
- administration period
- estate income
- personal allowance
- chargeable gain
- annual exempt amount