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Can Estate Administration Expenses Be Carried Back

Because I Cannot Find The Authority To Do This. (Deceased Estate R185 Completion).

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I will keep this as simple as possible.

Deceased estate residuary income and allowable expenses (absolute interest) during a 3 tax year administration period is:

Year 1   After tax income £5,000, expenses NIL

Year 2   After tax income £5,000, expenses NIL

Year 3   Income nil, expenses £6,000

Expenses relate to the accountant's element of his bill relating to the ascertaining of Estate income and the income element of the Estate income tax returns (it has been fraught with problems).

In tax year 2, let's say that estate cash was paid to the sole residuary beneficiary for the first time amounting to say £500,000. So, for year 2, his R185 measure of estate income was £10,000 (it was nil for year 1).

It took so long to determine the estate income that it was in year 3 that the executors were billed by the accountant.

I have combed through Tolleys under "Deceased Estates" as well as HMRC's Trust and Estate Manual (TSEM7200 to TSEM7900) to see if the year 3 allowable administration expenses can be carried back, but I cannot find any specific authority to do so.

Excess expenses can certainly be carried forward, but from experience, it can be towards the end of the administration period when accountancy bills are raised.

I am sure that donkey's years ago it was permissible to carry back excess expenses under the old rules, unless my memory is playing tricks.

Does this mean that the year 3 expenses are not R185 tax allowable.

 

Replies (17)

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By pauljohnston
09th Oct 2019 11:21

As I understand it there is only one tax cert for estates and this is issued when the administration of the estate is complete. Thus the one tax cert would should total income less allowable expenses. All untaxed income having been taxed at 20%

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Replying to pauljohnston:
By penelope pitstop
09th Oct 2019 19:09

Thanks for response.

I do not think that is quite correct because I have seen many protracted estate administration cases over the years. Where there has been income arising in each year and with at least one annual payment to beneficiary of income/capital/beneficiary debt written off there have been annual estate R185s prepared by solicitors/accountants.

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By John R
09th Oct 2019 18:45

It is too late in the day for me to get my head around S.668 ITTOIA but this may help.

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Replying to John R:
By penelope pitstop
11th Oct 2019 01:03

Thanks for that reference. I have studied it carefully, but it boggles my mind.

But I think I have got to the bottom of the problem. Please see my separate comments below. I do NOT think excess expenses can be carried back, only forward.

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Replying to penelope pitstop:
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By John R
11th Oct 2019 09:58

I disagree in relation to the beneficiaries' taxable distributions.

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Replying to John R:
By penelope pitstop
11th Oct 2019 11:48

I am all ears!

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Replying to penelope pitstop:
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By John R
11th Oct 2019 12:16

I have already given you the legislation that I think covers this point. If you want an interpretation, you will need to refer to your own tax library or HMRC guidance. I do not currently have time to research this for you.

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Replying to John R:
By penelope pitstop
11th Oct 2019 16:41

Thanks. I appreciate you are too busy. I know the feeling.

Cannot find a decent interpretation in my tax reference books.

Telephoned the HMRC specialist R185 unit and the HMRC specialist said "just do what you think is right. The amounts are trivial anyway".

The officers attitude was a disgrace. Is around£10,000 of R185 income "trivial".

Cannot see any reference to carrying back excess expenses in the HMRC T,S & E Manual. Will proceed along the basis that expenses cannot be carried back for the time being until I learn otherwise.

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Replying to penelope pitstop:
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By John R
11th Oct 2019 16:57

I hope this will convince you - Tolleys Taxwise states:
"Beneficiaries of a deceased estate with an absolute interest in residue

(5) For someone with an absolute interest in the residue of an estate, if the amounts to be deducted from the income of the estate exceed the income in any year, the excess is carried forward and deducted from future income in computing the residuary income of the estate and thus the beneficiary's assumed income entitlement (s 666(2), (6)).

(6) If, when the administration is completed, it is found that the total residuary income of the estate is less than the amounts paid to someone with an absolute interest (for example, because large bills are paid in the later stages of the administration), then the amount included in the statutory income of the person concerned is reduced to the actual residuary income. This is done by reducing the income of the tax year in which the administration is completed, then, if necessary, the previous year, and so on (s 668)."

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Replying to John R:
By penelope pitstop
14th Oct 2019 01:11

Thank you very much for the time you have spent researching this point. I must admit I am still struggling to get my head around section 668. It is rather brain-aching.

HMRC Trusts, Settlements and Estates Manual TSEM7690 agrees with what you say at your/Tolleys Taxwise point (5), namely that under section ITTOIA s666 subsections (2) and (6) "any excess deductions from the previous tax year" are "allowable estate deductions for a tax year" for the purposes of ascertaining "the residuary income of the estate". So far, so good.

The problem I have is with your/Tolleys Taxwise point (6) above. You say, and I quote:

"If..........it is found that the total residuary income of the estate is less than the amounts paid to someone with an absolute interest"

Whereas s668 says, in part, "This section applies if a person has an absolute interest in the ........residue of an estate and -
(a) the...............residuary income of the estate.........for all tax years (apart from this section), exceeds

(b) the total of all sums paid during or payable at the end of the administration period".

So you say "is less than". The legislation says "exceeds". I have no access to Tolleys Taxwise, so I do not know if it contains a clerical error. But it does appear to contradict the legislation. So I am none the wise yet.

I just wonder why on earth HMRC could not just create another TSEM page after TSEM7690 to show excess deductions being carried back. HMRC are quite explicit in showing excess deductions being carried forward.

If I get no further joy on this website I may have to have a second crack at speaking with HMRC R185 specialists (if I can locate them).

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Replying to penelope pitstop:
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By John R
14th Oct 2019 11:45

(a) above is the residuary income of the earlier years only due to the words "apart from this section" and (b) is for all years including the final year.
E.g. If residuary income for year 1 and 2 comes to, say £10,000 and year 3 (final) comes to minus £3,000, (a) will be £10,000 and (b) will be £7,000. So (a) exceeds (b) and it follows that the section applies.

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Replying to penelope pitstop:
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By Tax Dragon
14th Oct 2019 11:56

I agree with John here.

Perhaps you need a break - do something else, have a cup of tea and come back to s668 with a clear head.

And remember... if B is less than A then A exceeds B.

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Replying to Tax Dragon:
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By Tax Dragon
15th Oct 2019 11:41

…. but I would add that B (the amount referred to in s668(1)(b)) does not appear to be restricted to income. In your example where there was a payment of £500,000, maybe s668 is of no use whatsoever.

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By The Highlander
10th Oct 2019 13:29

A few things to clear up here:

1. The accountants fee's being allowable are dependent on whether there was a trade within the estate or simply dividends, interest, rent etc. If no trade existed then the accountant expenses cannot be offset - the same as the personal tax return expense isn't tax allowable but business accounts prep expense are against the trade.

2. Was the estate handled under annual estate trust returns or was it eligible for the informal tax payment procedure? Looking at the above notes I would expect it to be the latter, meaning you only need to tell HMRC about the full administration period at the end - once the administration period has ended and the funds have been distributed.

3. R185s are only issued in tax years where distributions have been made to beneficiaries. This means that you could have one R185 issued covering all income earned and tax paid during a 3+ year administration period if the full estate was distributed at the end of administration. R185s are not linked to the tax return requirements.

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Replying to The Highlander:
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By John R
10th Oct 2019 14:31

Re point 1 - the OP was asking about the administration fees that can be deducted from the amounts deemed to be distributable (i.e. the residuary income) under s.666 ITTOIA. She did not say that she wanted to claim the expenses as a deduction from the estate's income for the purposes of establishing the Estate's liability. The OP will however need to ensure that only those expenses relating to income are claimed (e.g. not re CGT). See HMRC guidance TSEM7900 et seq.

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Replying to The Highlander:
By penelope pitstop
11th Oct 2019 00:58

Thanks for the response, and please see my additional response in a separate box below. This additional response ought to settle my original query, because I think I have found the answer.

Also, imagine there is a straightforward deceased estate in administration for 2018/19 (ignore all brought forward figures). Also imagine the executors carry on with the deceased's trade (unusual but possible) and also letting property during the year, as well as liquidating the quoted share portfolio in the meantime.

The executors raise the following bill on 1 July 2019, shortly after the 2018/19 tax year ends, for dealing with the executors' estate tax return, trading and property accounts.

Business accounts £500
Rental accounts £300
CGT tax return work on share sales £400
Tax return work entering quoted dividends and deposit interest £150

Total billed 1 July 2019 £1,350

The £500 and £300 would be included in the trade and rental accounts as a business expense, accrued or cash basis.

The £400 CGT bill is not allowable at all against anything.

The £150 tax return work for dealing with the income elements DOES NOT feature at all on the Estate tax return. HOWEVER, it does depress the R185 income in a very precise order (i.e. dividend income first) because payments to residuary beneficiaries are deemed to be made out of income bearing tax at the basic rate in priority to the income bearing tax at the dividend ordinary rate.

BUT it depresses the 2019/20 R185 income, because it is allowed in the tax year it is paid, not accrued.

Hope this clarifies matters!

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By penelope pitstop
11th Oct 2019 00:34

I think I have found the answer in HMRC Trusts, Settlements and Estates Manual TSEM7690 under the heading of :

"Deceased persons: interests in residue: practical and computational aspects - excess expenses"

It mentions the old pre-1995/96 rules when excess expenses could be set against the residuary income of an earlier or later year for the purposes of higher rate only.

It then mentions that ESC A13 was withdrawn wef 6.4.95. This then ushered in ITTOIA 2005 s666(2)(6) for individuals from 1995/96. This provides that excess expenses are carried forward for the purposes of computing residuary income for all tax purposes.

So, there does NOT appear to be any provision for the carry back of excess allowable (income) R185 expenses during a period of administration of a deceased estate. Capital expenses are, of course, not allowable, and the HMRC Manual clarifies what sort of executors expenses are allowed against income, and in what particular order.

The moral therefore appears to be, bill as you go along!

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