Learning Outcomes
This article outlines personal representatives’ Income Tax and Capital Gains Tax responsibilities during estate administration, including:
- Identifying what counts as estate income during the administration period, and distinguishing it from the deceased’s pre‑death income for tax purposes
- Applying the correct Income Tax rates to different categories of estate income and recognising that estates do not benefit from personal, savings, or dividend allowances
- Calculating the estate’s Income Tax liability and preparing accurate distribution statements for beneficiaries, including correct use of Form R185 (Estate Income)
- Determining when loan interest used to pay Inheritance Tax is deductible from estate income, and understanding the statutory limits on that relief
- Analysing when Capital Gains Tax arises on post‑death disposals by personal representatives, including treatment of probate value, annual exempt amount, and applicable CGT rates
- Meeting HMRC reporting and payment obligations, including SA900 returns for complex estates, balancing payments by 31 January, 60‑day UK residential property CGT returns, and the informal payment procedure for simpler estates
- Managing risk through robust record‑keeping, correct apportionment of income and gains, and careful timing of asset realisations and distributions so as to minimise tax exposure and avoid personal liability
SQE1 Syllabus
For SQE1, you are required to understand personal representatives’ Income Tax and Capital Gains Tax responsibilities during estate administration, with a focus on the following syllabus points:
- 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
- when loan interest used to fund Inheritance Tax can be deducted from estate income
- when a “complex estate” must file a self-assessment return and the 60‑day rule for UK residential property CGT reporting
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. They must also complete the deceased’s final pre‑death tax affairs, which are separate from the estate’s position.
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.
Personal representatives owe duties of reasonable care and skill and can be personally liable to HMRC if they distribute the estate before ensuring tax has been correctly assessed and paid. Good practice includes timely asset realisation, careful record‑keeping, and ensuring the estate’s tax position is finalised for each tax year covered by the administration period before making final distributions.
Income Tax Liability During Estate Administration
Taxable Income of the Estate
During the administration period, the estate may receive income from:
- interest on bank, building society or National Savings accounts
- rental income from property
- dividends from shares and distributions from collective investments
- business or trading income (where the deceased’s business continues temporarily)
- other investment income and royalties
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.
A critical distinction is between income due to the deceased before death and income arising after death. For example, a dividend declared and due before death is part of the deceased’s final personal tax return; a dividend payable after death is estate income. There is no day‑to‑day apportionment for Income Tax: the due date governs whether income falls pre‑ or post‑death.
Tax Rates and Allowances
Income Tax on estate income is charged at the basic rate for most types of income and at the dividend ordinary rate for dividends. The current rates to apply in administration are:
- non‑dividend income (e.g., interest, property, trading): 20%
- dividends: dividend ordinary rate (currently 8.75%)
Personal representatives do not receive the personal allowance, the Personal Savings Allowance, the Starting Rate for Savings, or the Dividend Allowance. Bank and building society interest is usually received gross; the estate pays 20% on it. Dividends are received gross; the estate pays 8.75%.
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 (nor the savings or dividend allowances).
Specific exceptions apply to certain tax‑favoured wrappers. Income and gains within an ISA can remain exempt in the administration period for up to three years from death or until administration completes, whichever is earlier. This preserves the ISA tax advantages while PRs deal with the estate.
Calculation and Reporting
Personal representatives must:
- identify all sources of estate income and whether each item is pre‑ or post‑death
- calculate the tax due at the correct rates and by category
- pay the tax to HMRC, usually by 31 January following the end of the tax year
- provide beneficiaries with statements of income and tax deducted (Form R185 (Estate Income)) where income is distributed
Key Term: R185 (Estate Income)
HMRC certificate given by personal representatives to beneficiaries showing the nature of estate income paid and the tax accounted for by the estate.
HMRC offers an “informal payment” process for straightforward estates with modest tax, which can be used once, at the end of the administration period. Where an estate is “complex”, formal self‑assessment returns (SA900) are required for each tax year of administration.
Key Term: complex estate
An estate that must file self‑assessment. HMRC treats an estate as complex where, for example, the estate’s Income Tax or CGT due for the year exceeds £10,000, the gross estate exceeds £2.5 million, or more than £500,000 of assets are sold in any tax year after death.
Payment dates and penalties broadly mirror the self‑assessment regime for individuals (balancing payment by 31 January following the tax year; interest and penalties apply to late filing or payment).
Key Term: informal payment procedure
HMRC’s facility allowing PRs of simple estates to settle the entire Income Tax/CGT liability for the administration period without annual SA900 filings, once administration has ended.
Deductible Expenses: loan interest to fund IHT
Where PRs take out a loan to pay Inheritance Tax to obtain the grant, interest on that loan can be deducted from estate income when computing Income Tax, but the relief is restricted. It applies only to interest on a qualifying loan used to pay IHT attributable to personalty vesting in the PRs, and only for up to one year. Overdraft interest is not deductible.
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
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 £3,000?
Answer:
Gain: £15,000 – £10,000 = £5,000
Less annual exempt amount (AEA): £3,000
Taxable gain: £2,000 at 20% = £400 CGT.
Note: the estate’s AEA is available in the year of death and the following two tax years only.
Distribution to Beneficiaries
When income is paid to beneficiaries, it is treated as received net of the tax accounted for by the estate. PRs should issue Form R185 (Estate Income) specifying the type of income and tax accounted for. Beneficiaries include the grossed‑up amounts on their returns and can:
- reclaim if their liability is less than the tax deemed paid by the estate (e.g., non‑taxpayers), or
- pay any higher/additional rate top‑up where applicable.
The estate itself cannot use beneficiaries’ unused allowances, and beneficiaries cannot transfer their allowances to the estate.
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 Form R185 (Estate Income) showing the gross amounts and tax treated as paid: dividends gross £4,000 taxed at 8.75% by the estate, interest gross £2,000 taxed at 20% by the estate, and the net amount actually paid (£3,000). The beneficiary uses the R185 to compute any additional tax due (or claim a repayment).
Worked Example 1.4
Scenario:
Estate income in 2024/25: bank interest £3,600; UK dividends £1,140. No distributions are made until after 5 April 2025. Compute the estate’s Income Tax.
Answer:
Interest: £3,600 × 20% = £720
Dividends: £1,140 × 8.75% = £99.75
Total Income Tax: £819.75
No personal, savings or dividend allowances are available to the estate.
Worked Example 1.5
Scenario:
PRs borrow £100,000 on 1 July 2024 at 6% to pay IHT on personalty, and repay the loan on 15 March 2025. Interest paid in 2024/25 is allowable?
Answer:
Allowable deduction: interest relating to the period and only for up to one year on a qualifying loan used to pay IHT on personalty.
Interest for 1 July 2024–5 April 2025 (approx. 279/365 of £6,000 ≈ £4,590) is deductible against estate income for 2024/25. Overdraft interest would not be allowable.
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. There is no CGT on death: PRs are deemed to acquire the deceased’s assets at market value on the date of death.
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).Key Term: probate value
The market value of an asset at the date of death used for IHT and, typically, as the CGT base cost for personal representatives and legatees.
Calculation of Gains
The estate’s base cost is the probate value, unless that value is adjusted by post‑mortem reliefs (e.g., share loss relief or land loss relief claimed for Inheritance Tax), in which case the adjusted value becomes the CGT base cost. The gain is:
Sale proceeds – Probate (or adjusted) value – allowable costs = 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. For 2024/25, the AEA is £3,000. For estates, it is available for the year of death and the next two tax years.
CGT Rates
For personal representatives:
- most assets: 20%
- residential property: 24% for carried interest and residential gains from 6 April 2024? Note: for PRs the long‑standing position is 28% on residential property gains. If HM Treasury reduces the residential property higher rate for individuals, PR rates typically remain 28% unless stated otherwise. For SQE purposes, apply 28% for estate gains on residential property.
CGT is charged after applying the estate’s AEA (where available). Capital losses must be set against gains in the same year; surplus losses can be carried forward.
Distribution and Appropriation of Assets
A distribution of an asset to a beneficiary in satisfaction of a legacy or on intestacy is not a disposal for CGT purposes. The beneficiary is treated as acquiring the asset at the probate value (or adjusted base cost). Appropriation of assets to satisfy a legacy follows the same principle, and no disposal arises for the estate.
Reporting and Payment
Personal representatives must report disposals and pay any CGT due by 31 January following the end of the tax year through self‑assessment, unless using HMRC’s informal process at the end of administration for simple estates. For UK residential property, any CGT due must be reported and paid within 60 days of completion via the UK Property CGT return.
Worked Example 1.6
Scenario:
PRs sell a UK residential investment property in August 2024. Probate value £300,000; sale proceeds £345,000; selling costs £5,000. No other gains. Compute CGT and reporting.
Answer:
Gain before AEA: (£345,000 – £5,000) – £300,000 = £40,000
Less estate AEA (2024/25): £3,000
Taxable gain: £37,000
CGT at 28% (residential rate for PRs): £10,360
Reporting: UK Property CGT return and payment within 60 days of completion. The gain is also included in the estate’s SA computation for the year.
Duties and Compliance
Personal representatives must:
- keep accurate records of all income, expenses, and disposals
- identify pre‑death vs post‑death income correctly and ensure the deceased’s final return is completed
- file SA900 returns and pay tax due before distributing the estate where the estate is complex, or use the informal process once administration has ended for simpler estates
- provide beneficiaries with Form R185 (Estate Income) where estate income is distributed
- comply with 60‑day UK Property CGT reporting on taxable disposals of UK residential property
- consider timing of distributions to avoid personal liability for unpaid tax or claims (e.g., ensure liabilities are settled and reserve for final tax)
Failure to comply may result in personal liability for unpaid tax and possible penalties and interest.
Worked Example 1.7
Scenario:
PRs of an estate make final distributions in August 2025, having paid all known liabilities. In October 2025, they discover bank interest of £2,400 credited in March 2025 to an account they had overlooked. Income Tax has not been paid.
Answer:
The interest is estate income for 2024/25, taxable at 20% (£480). The PRs remain liable to settle the tax and should file or amend returns, pay the tax (plus any interest), and may need to recover sums from residuary beneficiaries if insufficient funds remain. Premature distribution can expose PRs to personal liability.
Special Considerations
Distinguishing pre‑death and post‑death income
The due date of income determines which side of death it falls on. For example, rent due before death belongs on the deceased’s final return even if received after death. Post‑death rent is estate income. The Apportionment Act does not apply for Income Tax.
International Assets and Double Taxation
If the estate includes foreign assets, PRs must consider foreign tax on income or gains and whether double taxation relief is available. A UK‑resident estate is taxable on worldwide income and gains; double taxation agreements and unilateral relief may eliminate double charges.
ISA holdings and surviving spouse
ISA tax advantages can continue during the administration period (up to three years). A surviving spouse or civil partner may also be entitled to an “additional permitted subscription” equal to the ISA value at death.
Anti‑Avoidance
Personal representatives should avoid contrived arrangements and ensure all transactions are at arm’s length. HMRC may impose penalties for inaccurate returns or for failing to notify chargeability. Comply with the general anti‑abuse rule and specific anti‑avoidance provisions where relevant.
Key Term: UK Property CGT return (60‑day)
A standalone online return for UK residents (including PRs) to report and pay CGT on UK residential property disposals within 60 days of completion where CGT is due.
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 20% (non‑dividend) and the dividend ordinary rate (currently 8.75%). No personal, savings or dividend allowances are available to estates.
- Interest on a qualifying loan taken out to pay IHT on personalty may be deducted from estate income for up to one year.
- Capital Gains Tax is calculated using probate value as base cost, with the estate’s annual exempt amount available for the year of death and the following two tax years.
- CGT is generally at 20% (most assets) and 28% for residential property gains made by personal representatives.
- Distributions of assets to beneficiaries are not CGT disposals; beneficiaries inherit at probate value (or adjusted base cost).
- PRs must report and pay tax: SA900 for complex estates, and 60‑day reporting for taxable disposals of UK residential property.
- PRs provide Form R185 (Estate Income) to beneficiaries receiving estate income; beneficiaries then account for any further tax.
- ISA tax advantages can continue in the administration period for up to three years, and spouses may have an additional permitted subscription.
- Failure to comply can expose PRs to personal liability for unpaid tax, penalties, and interest.
Key Terms and Concepts
- personal representative
- administration period
- estate income
- personal allowance
- chargeable gain
- annual exempt amount
- probate value
- R185 (Estate Income)
- complex estate
- informal payment procedure
- UK Property CGT return (60‑day)