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The completion of a trust and estate tax return should not be confused with the requirement to complete separate returns in respect of any Inheritance Tax liabilities the estate may owe. These have different time limits for submission of the forms and payment of any liabilities, often earlier than the need to file tax returns in respect of the income and gains of deceased person or their estate.
Are there any outstanding issues with the deceased’s tax affairs?
There may be more than one tax year that needs to be dealt with. For someone that dies early on in a tax year (say 1 May 2021), it is unlikely that their tax affairs for the tax year 2020/21 would have been finalised before they died. There will also the short period from 6 April 2021 to 1 May 2021 in the tax year 2021/22 to be considered as to whether a Tax Return requires completion.
For individuals that had an existing tax agent, it is worth noting that Agent Authority lapses on death and it is necessary for a new 64-8 to completed and submitted by the personal representative so that your adviser can continue to speak to HMRC.
Does a tax return need to be prepared for the deceased?
If HMRC have issued a tax return, then they do need to be completed. It is the responsibility of the personal representatives to ensure that income and gains have been correctly reported to HMRC and it is their duty to approve and sign the return.
Who pays any tax that is due?
Tax up to the date of death is paid out of the assets of the estate by the personal representative. If there is no money available because probate has not been granted, the personal representative may need to arrange a loan to pay the tax due.
Who receives any tax refund that is due?
The refund will be payable to the estate.
What are the time limits for finalising the tax affairs of the deceased?
Any tax returns that HMRC have issued should be filed by 31 January following the end of the relevant tax year.
A tax return for the tax year 2020/21 is due to be filed electronically by 31 January 2022; a tax return for the period from 6 April 2021 to the date of death in 2021/22 is due to be filed electronically by 31 January 2023.
Where a tax return is to be filed on paper, different deadlines apply. It is important that you should try and finalise the tax position of the deceased as soon as possible.
Dealing with Estates in administration
Personal representatives also have a duty to report to HMRC any untaxed income and capital gains that arise during the period of administration. From 6 April 2016, tax was no longer deducted at source on bank accounts and the dividend tax credit was abolished. Currently, the legislation requires that even small amounts of investment income arising within an estate should be reported and tax paid.
The administration of some complex estates can run into several years and it will be the responsibility of the personal representatives to consider whether a tax return needs to be filed throughout the period of the administration. HMRC do charge penalties on the late submission of a trust and estate tax return, as well as interest and surcharges on tax not paid on time.
Personal Representatives are not entitled to savings allowance in the same way that individuals may receive up to £1,000 of gross interest without an income tax charge and they are also not entitled to the dividend allowance applicable to the first £2,000 of dividend income.
If the estate sells a residential property, there is still a requirement to report and pay any Capital Gains Tax payable within 60 days of completion, unless the administration of the estate will be finalised within that time whereby the gain can be reported by letter as set out below.
As described above, untaxed estate income and capital gains need to be reported on the trust and estate tax return. For straightforward estates where the tax liability is small, HMRC recognise the need for simplicity and have adopted an informal procedure to settle the tax affairs.
The informal procedure requires a written summary of income and gains, and a computation of the estate’s tax liability. The whole period of administration should be reported together and, if the administration has ceased, it is not necessary to wait until after the end of the tax year. Once HMRC have agreed the tax they will issue a payslip and reference number to settle the liability.
This informal approach means that most estates avoid being in the self-assessment system. There is no requirement to register the estate, or to complete a tax return.
Additionally, the time limits, interest and penalties of the self-assessment system do not apply.
What are the limits for informal arrangements?
The standard criteria for adopting informal procedures are as follows:
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