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.
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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%
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.
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)."
(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.
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.
…. 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.
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.
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.