Income Tax and Capital Gains Tax during estate administratio...

Learning Outcomes

This article outlines the tax compliance and reporting framework for Income Tax and Capital Gains Tax during estate administration, including:

• the role and statutory duties of personal representatives (PRs) in managing Income Tax and CGT liabilities for the estate
• identification of estate income and chargeable gains, distinguishing them clearly from the deceased’s pre‑death income and disposals
• computation of Income Tax on estate income and CGT on disposals, applying correct tax rates, annual exempt amounts and reliefs
• comparison of HMRC’s informal payment procedure with full Self Assessment estate tax returns (Form SA900), and when each route is appropriate
• registration, filing and payment deadlines, including the 60‑day UK residential property CGT regime and standard 31 January deadlines
• requirements for issuing beneficiary statements (Form R185) and explaining how estate tax already paid is treated in beneficiaries’ hands
• treatment of ISAs post‑death, loan interest relief, appropriations to beneficiaries or charities, and the impact of probate valuations on CGT base costs
• recognition of common compliance errors in exam scenarios and selection of practical steps PRs should take to remain within the law

SQE1 Syllabus

For SQE1, you are required to understand the tax compliance and reporting obligations of personal representatives during estate administration, with a focus on the following syllabus points:

• the scope of Income Tax and CGT during the administration period
• how PRs calculate and pay Income Tax on estate income and CGT on asset disposals
• the annual exemptions and tax rates that apply to estates
• the main reporting requirements and deadlines for PRs
• the transition of tax liability from the estate to beneficiaries
• practical compliance steps and common errors
• when the estate must register for Self Assessment and obtain a UTR
• criteria for using HMRC’s informal payment procedure for simple estates and when a full SA900 is required
• the continued ISA tax advantages post‑death and their limits
• the 60‑day CGT regime for UK residential property disposals by PRs
• the effect of probate valuations and post‑mortem relief on CGT base costs
• issuing beneficiary statements (Form R185) for distributions of estate income

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.

1. Who is responsible for paying Income Tax and Capital Gains Tax on income and gains arising during the administration period of a deceased’s estate?
2. What is the annual exempt amount for CGT available to personal representatives, and for how long can it be claimed?
3. When must CGT on the sale of UK residential property by PRs be reported and paid?
4. True or false? The estate is entitled to a personal allowance for Income Tax during administration.

Introduction

When a person dies, their personal representatives (PRs) must collect in the assets, pay debts and liabilities, and distribute the estate to those entitled. A key part of this process is ensuring that all tax liabilities arising during the administration period are correctly calculated, reported, and paid. This article explains the main rules on Income Tax and Capital Gains Tax (CGT) during estate administration, focusing on the compliance and reporting duties of PRs.

Key Term: personal representatives (PRs)
The persons (executors or administrators) legally responsible for managing the estate of a deceased person until it is distributed.

Tax arises both on income accruing to estate assets and on gains realised on disposals during administration. The estate pays tax under Self Assessment unless it qualifies for HMRC’s informal payment procedure for simple estates. PRs must monitor deadlines closely—particularly the separate 60‑day CGT regime applicable to disposals of UK residential property—keep robust records, and provide beneficiaries with tax information where income is distributed.

Income Tax during Estate Administration

The Administration Period

The administration period starts on the day after death and ends when the estate is fully administered. During this time, the PRs are responsible for all tax on income arising from estate assets.

Key Term: administration period
The period from the day after death until the estate is fully distributed, during which PRs manage the estate and are responsible for tax compliance.

Not all receipts post‑death are estate income. Income is attributed by due date, not by apportionment over time. Income due and payable before death belongs to the deceased’s final Income Tax computation, even if received after death; income due and payable after death is estate income. The Apportionment Act 1870 does not apply to determine income tax liability timing.

Income Tax Liability

PRs must pay Income Tax on all income generated by estate assets during the administration period. This includes interest, dividends, rent, and trading income. The estate is not entitled to a personal allowance, so all income is taxable.

The estate’s taxable income is computed from gross receipts less allowable deductions. Administration expenses generally are not deductible for Income Tax. However, there is a limited relief for interest on a loan taken out to fund Inheritance Tax payable on personalty vesting in the PRs; this relief is restricted and time‑limited.

Key Term: ISA post‑death treatment
ISAs retain their tax‑free status on income and gains during estate administration and for up to three years after death (or until the ISA is closed if earlier). Estate income and gains within the ISA remain exempt in this period. A surviving spouse or civil partner may have an “additional permitted subscription” allowance equal to the ISA value at death.

Tax Rates and Allowances

• Interest and rent: Taxed at the basic rate (currently 20%).
• Dividends: Taxed at the dividend ordinary rate (currently 8.75%).
• No personal allowance: Estates do not benefit from the personal allowance available to individuals.
• No savings or dividend allowances: These do not apply to estates.

PRs must include dividends gross (since dividends are paid gross) and interest in full; any tax withheld at source (e.g. pre‑2016 historic bank interest) is rare and should be reconciled.

Reporting and Payment

PRs must register the estate with HMRC if the estate’s income exceeds £10,000, if CGT is due, or if the estate is “complex” (e.g., high value or many beneficiaries). PRs may use the informal payment procedure for small, simple estates, but otherwise must file an estate tax return (Form SA900).

Key Term: informal payment procedure
HMRC’s one‑off process allowing PRs of simple estates to submit a single calculation and payment for Income Tax and CGT for the whole administration period without filing SA900s for each tax year. It is available only at the end of administration and only where complexity thresholds are not met.

An estate is usually treated as complex if any of the following apply:

• probate value exceeds £2.5 million
• total Income Tax and/or CGT due for the whole administration exceeds £10,000
• proceeds of assets sold by PRs in any one tax year exceed £500,000 (for dates of death after 5 April 2016)

Where complex criteria are met (or later become met), the estate must be within Self Assessment, obtain a UTR, and file SA900 returns for each tax year straddled by administration.

Key Term: Form SA900
The Trust and Estate Tax Return used by PRs to report estate income and gains for each tax year within the administration period.

Income Tax must be paid by 31 January following the end of the tax year in which the income arose. Online SA900 filing is due by 31 January; paper returns (where permitted) are due by 31 October. Failure to pay on time results in interest and penalties.

Distributions to Beneficiaries

When PRs pay income to beneficiaries, they must provide a statement (Form R185) showing the gross income and tax paid. Beneficiaries include the income on their own tax return and may claim a refund if their own tax rate is lower.

Key Term: Form R185
A certificate issued by PRs showing beneficiaries the amount of estate income distributed to them and the tax treated as paid, for inclusion in the beneficiary’s tax return.

Note that the beneficiary’s entitlement to income depends on the terms of the will/intestacy and the timing of residue ascertainment. Until residue is ascertained, estate income belongs to PRs; once income is paid out, R185s must reflect the gross income and tax treated as paid by the estate.

End of Administration

Once the estate is fully administered, tax liability on future income passes to the beneficiaries, who are then responsible for their own tax compliance. PRs should ensure all SA900 filings are complete, settle any tax due, issue R185s as needed, and retain records. PRs remain in office for life, but new assets discovered later typically entail limited further tax steps.

Capital Gains Tax during Estate Administration

CGT Liability

PRs are liable for CGT on gains made from the disposal of estate assets during the administration period. The gain is calculated as the difference between the sale proceeds and the probate value (value at date of death), less allowable costs.

Key Term: probate value
The value of an asset at the date of death, used as the acquisition cost for CGT purposes during estate administration.

The estate is deemed to acquire assets at market value at death. If post‑mortem reliefs are claimed for IHT (e.g., for quoted shares or land), the revised value becomes the CGT base cost. Capital losses realised by PRs are set against gains in the same tax year and any excess is carried forward by the estate.

Annual Exempt Amount

PRs are entitled to the same annual exempt amount as individuals, but only for the tax year of death and the following two tax years. After that, no exemption applies. The amount is set by law and changes over time; for 2023/24 the amount was £6,000; from 2024/25 it is £3,000. Always work with the figure applicable to the tax year of disposal.

Tax Rates

• Residential property: Gains taxed at 28%.
• Other assets: Gains taxed at 20%.

These estate rates mirror the higher rates applicable to individuals; PRs do not benefit from the lower basic rate for gains within basic rate bands.

Reporting and Payment (CGT)

• UK residential property: CGT must be reported and paid within 60 days of completion using HMRC’s online service for UK Property Account. This regime applies to PRs.
• Other assets: Gains are reported in the estate’s tax return (SA900), with payment due by 31 January after the end of the tax year.

Where a disposal gives rise to both 60‑day property reporting and inclusion in SA900, the 60‑day report and payment must be made first; the disposal is then reflected in SA900 for the year.

Distributions of Assets

If PRs transfer assets to beneficiaries instead of selling them, there is generally no CGT charge at that point. The beneficiary acquires the asset at the probate value. Appropriation can be used strategically:

• Appropriation to a charity before sale allows the charity to realise gains exempt from CGT.
• Appropriation to an individual beneficiary can shift gains to the beneficiary, who may have their own annual exemption or reliefs.

Appropriation must be validly made before sale and recorded.

Beneficiaries’ CGT

If a beneficiary later disposes of an inherited asset, their gain is calculated using the probate value as their acquisition cost. If assets were appropriated to the beneficiary before sale, any resulting gain belongs to the beneficiary and is taxed in their hands.

Compliance and Reporting Requirements

Record-Keeping

PRs must keep detailed records of all income, expenses, asset sales, and valuations. This includes:

• date of death valuations and any later agreed values for IHT
• acquisition and disposal documentation for assets sold
• computation of gains/losses and evidence of allowable costs (e.g., brokerage, legal fees)
• estate bank statements showing receipt and distribution of income
• R185s issued to beneficiaries
• evidence of any appropriation of assets before sale
• UK property CGT 60‑day reports and payments
• correspondence with HMRC and copies of SA900 filings

Accurate records are essential for SA900 computations and to address any HMRC inquiries.

Deadlines

• Income Tax: 31 January after the end of the tax year.
• CGT on UK residential property: 60 days from completion.
• CGT on other assets: 31 January after the end of the tax year.

Missed deadlines attract interest and penalties. For paper SA900, the filing deadline is 31 October after the tax year.

Common Pitfalls

• Failing to report income or gains on time.
• Missing the 60‑day CGT deadline for residential property.
• Assuming personal, savings or dividend allowances apply to estates (they do not).
• Using the wrong CGT annual exempt amount or claiming it beyond the permitted window (year of death plus two).
• Misclassifying pre‑death income as estate income (or vice versa).
• Selling assets that could have been appropriated to a charity to achieve CGT exemption.
• Distributing all assets before tax is settled.
• Not retaining enough funds to pay tax liabilities.
• Ignoring the complex‑estate thresholds and failing to file SA900 for each tax year.
• Omitting R185 certificates where estate income is distributed.

Worked Example 1.1

Scenario: PRs sell a residential property from the estate for £500,000. The probate value was £450,000. Selling costs are £10,000.

Answer:
Gain = £500,000 (sale) – £450,000 (probate value) – £10,000 (costs) = £40,000. Deduct the annual exempt amount if the estate is within the year of death or the next two tax years and the AEA remains available (use the correct amount for the tax year). Tax is due at 28% on the taxable gain. Report and pay within 60 days of completion via HMRC’s UK property service and reflect the disposal later in SA900.

Worked Example 1.2

Scenario: PRs receive £8,000 interest and £4,000 dividends during administration. What tax is due?

Answer:
Interest: £8,000 × 20% = £1,600. Dividends: £4,000 × 8.75% = £350. Total tax due: £1,950. No personal, savings or dividend allowances apply to the estate.

Worked Example 1.3

Scenario: The estate holds quoted shares standing at a gain. The residue is partly charitable. The PRs plan to sell the shares and distribute cash. How can CGT be mitigated?

Answer:
Appropriate the relevant shares to the charity before sale, then sell as nominee for the charity. Charities are exempt from CGT. A valid appropriation prior to sale allows the charity to realise the gain tax‑free. Record the appropriation and sale on behalf of the charity and adjust distributions accordingly.

Worked Example 1.4

Scenario: PRs borrow £50,000 to pay IHT on personalty vesting in them and incur £2,000 interest within 12 months. Estate income comprises £12,000 interest. How is the loan interest treated?

Answer:
Interest on a qualifying loan to fund IHT on personalty is deductible from estate income, subject to statutory limits (including a time‑limit of one year). Taxable income can be reduced by £2,000, so taxable interest becomes £10,000; Income Tax at 20% = £2,000.

Worked Example 1.5

Scenario: PRs complete the sale of the deceased’s UK rental flat on 15 June. Probate value was £300,000. Net sale proceeds are £345,000. Costs are £5,000. Are there CGT reporting obligations?

Answer:
Gain = £345,000 – £300,000 – £5,000 = £40,000. CGT at 28% applies on the taxable amount after any available annual exemption, and a UK residential property CGT return must be filed with payment within 60 days of 15 June. The disposal is also included in SA900 for the tax year.

Exam Warning

For SQE1, remember that PRs must pay CGT on asset disposals during administration, but beneficiaries are only liable for CGT on gains after they receive the asset. Watch for questions testing who is liable for tax at each stage. Be alert to the 60‑day UK property CGT reporting obligation and that estates do not benefit from personal, savings or dividend allowances.

Revision Tip

Always check the latest annual exempt amount and tax rates for the relevant tax year in the exam. HMRC updates these figures regularly.

Key Point Checklist

This article has covered the following key knowledge points:

• PRs are responsible for Income Tax and CGT compliance during the administration period.
• The estate pays Income Tax on all income received; no personal, savings or dividend allowances apply.
• Income is attributed by due date (pre‑death vs post‑death); apportionment does not apply for Income Tax timing.
• ISAs can retain tax advantages during administration, typically for up to three years post‑death.
• PRs must report and pay CGT on gains from asset disposals, using the probate value as the acquisition cost.
• PRs are entitled to the annual CGT exemption for the year of death and the next two tax years only; after that, no exemption.
• CGT on UK residential property must be reported and paid within 60 days of completion.
• Appropriation to charities can secure CGT exemption on a sale; appropriation to beneficiaries can shift gains to them.
• PRs must keep accurate records and file SA900 returns by the correct deadlines or use HMRC’s informal procedure where eligible.
• Tax liability on future income and gains passes to beneficiaries once assets are distributed and residue is ascertained.
• PRs must issue Form R185 when distributing estate income.
• Be aware of complex‑estate criteria that trigger full Self Assessment filings.

Key Terms and Concepts

• personal representatives (PRs)
• administration period
• probate value
• isa post‑death treatment
• informal payment procedure
• Form SA900
• Form R185