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Death and Taxes

Death and Taxes

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I've a client for whom I'm the executor and administrator.  The client is very likely to die in Tax year 2016/17.  The spouse is the sole beneficiary of the will.  The client has regular savings income.  Both client and spouse are, currently, just below the higher rate income tax threshold  How should I act to make best use of the client's 2016/17 tax allowances?  I'm thinking particularly of savings income received after the death.  How long, if at all, after death will the income tax liability remain that of the deceased - and how should I act to, presumably, prolong that period?

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By maxaca
07th Jan 2016 12:53

any income received after death is income of the Estate

(i.e. the surviving spouse) not the deceased individual - you cannot 'prolong' anything to change this!

Arguably the wife's income generating investments could be transferred to the husband ASAP to maximise his pre-death income, then she gets all the income after he has died and presumably there will be no IHT consequences assuming they are both UK domiciled, although this is somewhat contrived and its value will depend on the particular circumstances, the actual date of death and doing the maths. Under the circumstances the couple may have other priorities?

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By Melody
07th Jan 2016 18:53

HMRC will automatically calculate tax

Much of this is dealt with automatically by HMRC.

If the death is registered using the Tell Us Once service HMRC will contact you. They usually use all the info to which they have access to calculate a tax return and send it to you as Personal Representative. They'll let you know if they need a "tailored" SA return completed. (They scrapped form R27 because it caused them more trouble than it was worth!). In most cases someone who has died partway through the tax year won't have used up his full personal allowance, so a refund cheque is likely to arrive. The bereavement department at HMRC are quite helpful if you have any questions and do not take so long to answer as the rest of HMRC!

As for savings income, trying to maximise interest may well be as effective as continues to be received is probably more effective than tax planning for it.

Bank/building society interest will be continue to be paid as normal, i.e. net of basic rate tax in most cases until April this year, when it will be paid gross for everyone.

Depending on the terms of each account, you may find a bank unilaterally moves savings to a lower interest account. Fixed term savings may well continue until their full term, but early withdrawal penalties are often waived on death.

ISAs held will lose their tax free status as from the date of death. The bank will either change the status of the account to reflect this or transfer ISA money into another (probably low interest) account. But the wife can use the new Inherited ISA Allowance to invest an equivalent amount of cash in her own ISA or in a new ISA at the best rate she can get. It is the allowance that is inherited (and of course the cash), not the actual account.

It is also important to ensure continued access to cash during the estate administration period to avoid a source of further distress at a difficult time.

(1)Ensure the mortgage and other household bills, standing orders etc come out of either an account in the wife's name or a joint account, as bank/building society accounts in the husband's sole name will be frozen by the banks until probate is obtained.

A joint account passes to the survivor on the death of one partner, so is outside the scope of the will or probate (but not tax). In fact, if both parties are willing they may wish to make one or more sole accounts joint. (And of course it is not impossible that the wife could die first, leaving a terminally ill husband needing to pay the bills)

(2)Ensure that the the wife has at least one credit card in her own name, or as the main account holder. "Joint" credit cards are never truly joint, and many people don't realise until a card is declined that if the main account holder dies the account is automatically closed and the surviving spouse cannot use it.

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By emanresu
07th Jan 2016 20:31

..

Thank you both. The specific issue I'm trying to advise on is how should the couple act to make best use of the client's 2016/17 tax allowances. As I mentioned, the couple concerned have been able to optimise their incomes to each keep just below being in the higher rate band - or, as I suppose it is better to say from 2016/17 onward - to avoid paying income tax at 40%.  In the future, with the current strategies this will not be the spouse's situation - as all the deceased's allowances vanish and all of that extra income piles in at 40%.  It is just the transition between the two that I'm trying to work out for them.  Once the client's income for 2016/17 reaches £43,000 there's little they can do.  I'm just trying to get a grip on how far the client's liability to tax can be extended so that the maximum of the clients notional income can be taxed to the client.  The worst case is that all income received post-mortem is regarded as the spouse's liability.  The best is - well, that is what I'm seeking advice on.

Thank you for your detailed list of ideas, Melody.  I've covered them all with the client - plus how  NS+I certificates will be treated (yes, they can be inherited) - plus the FSCS ramifications of adding £75,000 to £75,000 - plus the loss of access to interest-bearing limited deposit savings products (e.g. interest-bearing bank accounts) they've both fully funded in individual names.  All pretty grim stuff.

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By Paul D Utherone
07th Jan 2016 22:17

If you knew they were going to die on 6 Oct

and assuming the income accrued equally across the year,,you could perhaps put all the income assets in dying spouses name  but unless income did do that and they had a one way ticket to Switzerland booked at the end of September I don't suppose you can. And then you would need to consider what the surviving spouse lived on when they became a widow(er) while the estate was processed and everything got frozen for probate.

Perhaps look for assets with large potential CGT and move them to the dying spouse to get the probate uplift n base cost?

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By cparker87
08th Jan 2016 00:34

as an aside

I won't add to the comments above.

However, as a side note if you were licensed to act in a professional capacity as an executor (or administrator) you'd be reasonably be expected to know about topics such as income tax pre and post death together with the tax implications of the income of the estate after death.

If you're ICAEW (not sure about ACCA) and not licensed then you can't take the appointment of excecutor so do take care before doing so. 

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By Melody
08th Jan 2016 01:27

Administration period.

I agree with Paul D Utherone about CGT, as this is not payable on gifts to/from a spouse or on an inheritance, and if the wife sells an asset in the future the base cost will then be the market value at time of death.

Otherwise it's a difficult one, and the time of death is important, but I'm sure the wife would rather have the husband with her until nearly the end of the tax year even if she becomes a higher rate taxpayer than gain from his unused personal allowance if he dies earlier.

It might be worth reading up about the administration period. Income arising during the administration period (until the estate is basically settled) is taxed separately on the estate and is not regarded as the beneficiaries' income until distributed. So income taxable on the estate in 2016/17 might not be distributed to the wife and declarable on her tax return until 2017/18. The distribution is regarded as if basic rate has been paid. 

So depending on the date of death and time taken for administration, there may be scope for slipping distribution of this income to the wife into an earlier or later tax year by working more or less slowly on it, or even staging payments across the end of a tax year.

A personal representative is not bound to distribute the estate of the deceased before the expiration of one year from the death. (Section 44 Administration of Estates Act 1925) 

But you'd have to check the calculations so a reduction in personal tax isn't outweighed by increased tax on the estate. And I'm not sure whether you can decide whether the first part of any distribution is from estate income or capital - I think HMRC has an assumption about that.

Good luck with this!

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By emanresu
08th Jan 2016 09:28

..

Melody wrote:

Otherwise it's a difficult one, and the time of death is important, but I'm sure the wife would rather have the husband with her until nearly the end of the tax year even if she becomes a higher rate taxpayer than gain from his unused personal allowance if he dies earlier.

It might be worth reading up about the administration period. Income arising during the administration period (until the estate is basically settled) is taxed separately on the estate and is not regarded as the beneficiaries' income until distributed. So income taxable on the estate in 2016/17 might not be distributed to the wife and declarable on her tax return until 2017/18. The distribution is regarded as if basic rate has been paid. 

So depending on the date of death and time taken for administration, there may be scope for slipping distribution of this income to the wife into an earlier or later tax year by working more or less slowly on it, or even staging payments across the end of a tax year.

A personal representative is not bound to distribute the estate of the deceased before the expiration of one year from the death. (Section 44 Administration of Estates Act 1925) 

But you'd have to check the calculations so a reduction in personal tax isn't outweighed by increased tax on the estate. And I'm not sure whether you can decide whether the first part of any distribution is from estate income or capital - I think HMRC has an assumption about that.

Good luck with this!

Thank you all for your thoughts.  Melody hits the nail on the head, so I'm quoting her text.  It is that precise issue that I've been trying to read up, and was hoping it might be something which other AW-ers would have had some experience to share.  I know that one has a year to process the estate, but can one regard all income as the deceased client's liability during that up-to-a-year?  In fact, can the investments be allowed to work on in the estate's name during that intentionally drawn-out period?

 

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By cparker87
08th Jan 2016 09:46

Won't quote, as it's long

Firstly, to Melody's point; income is deemed distributed first. 

What Melody refers to is "bunching" taxable income. If you intend to do so, you must ensure that you do not "ascertain" the estate. Doing so will cause a bare trust and income will be taxable directly on the beneficiaries in any case. 

Income during the administration period is taxable on the estate. When the estate is finally distributed, it does not lose its nature of income and it remains taxable on the beneficiaries when paid (unless ascertained as referred). If you accumulate £10k over 3 years and then pay it out, the beneficiaries will have £30k taxable income as at the date of payment. They will receive a tax credit for income tax paid by the estate. 

What you don't seem to be getting (and I apologise if I'm wrong because it's not entirely clear from your posts) is that you have two taxable entities. Mr X and "The Late Mr X". You cannot pretend that income arose on Mr X when it infact arose on TLMX. 
 

Re drawing out the process over a year.. You need to be very careful in taking this post (and, see earlier, licensed if ICAEW member). As an executor you open yourself up to personal liability for errors. Mrs X may be happy now to agree to deferring access to Mr X's estate but I don't expect that will last very long. As soon as it does and you distribute, she'll have taxable income. 

I simply can't imagine that having the assets and income tied up in the estate for a substantial period of time for (marginal?) tax efficiency is outweighed by closure and distribution. It ain't all about the tax!

You might also consider variations. 

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By pauljohnston
08th Jan 2016 11:37

ISA

Can not the husband put some assets into an ISA now?  Income will be tax free to death and after death the widow can use the allowance.  THere is no IHT so you the executor should be able to distribute sufficent assets early so that the income is again covered by the assets being in an  ISA.  THe widow will only have one Persoanl Alloawnce so moving items into tax free enviornment will benefit her year on year

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By Andp
08th Jan 2016 12:16

Not read the thread completely but its not clear if you are a lawyer , accountant , or neither. I strongly advise if you are accountant ,  you resign as executor immediately. It really is not worth the hassle , exposure to claims, or the fee. 

I know post death , executors can sign a deed of renounciation ( prepared by a lawyer ) and step down. 

See a lawyer and see what the process is pre death. 

Good luck , you are going to need it.

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By libraguy
08th Jan 2016 12:21

Be careful

As my nickname suggests, I'm male but Emanresu is maybe jumping to conclusions saying "her" in reference to Melody. Ironically, Melody's first post makes the assumption that it is the husband that is terminally ill whereas the original poster said it was his "client".

My wife thinks I'm a misogynist so I'm probably not alone! That would suggest that Melody is perhaps not female!

Very interesting comments in all other respects though peeps.

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By susanna russell-smith
08th Jan 2016 12:34

As cparker says, the income of the Estate is taxable on the Estate at basic rate in the first instance, but that cannot ever make it the deceased client's income subject to his tax rates. It doesn't matter how long the period of administration is, ultimately the income of the Estate ends up being taxed on the beneficiaries at their highest rates.

As soon as you make a distribution to the widow, any income received by the Estate up until that time is treated as being included in that distribution (up to the amount of the distribution, obvs) and you will be required to issue the widow with Forms R185(Estates) at the end of each fiscal year in which monies have been distributed, showing the income arising to her; she will then need to include that income on her SA Return and pay higher-rate on it if indeed it pushes her into that band.

If you pay nothing out until the end of year 2, the widow will receive two years' income at once, which wll be even more likely to push her into higher-rate - and make her even crosser that she has had to wait so long to receive any distribution at all!

The transfer of investments from wife to husband pre-death to both obtain a cgt uplift and temporarily pass the dividend income to him whilst he lives, as well as maximising husband's ISAs are good ideas.

If you are the named executor then there is nothing to stop you acting, although, if you don't have ICAEW registration, you may find it quicker to obtain probate by using a solicitor for the actual application to the Probate Registry.  

 

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By pauljohnston
09th Jan 2016 12:32

@sussanna

There will be no cgt uplift pre-death but I am not sure if this is a typo.  What you have alluded too as I did earlier that the husband could make sales and use up his CGT allowance, gifting the funds to his wife.  There is a cost though.

The op can get grant of probate within 7 days although if he uses a solicitor it may take longer.  However if you are executor all powers vest at death the problem is that a registar wont register the transfer until after probate is granted.  However that does not mean that the op can't effect the transfer, it just means that the name on the investment wont change until after probate.  So I suggest that once death has occurred and the op is are happy that there is sufficient in the estate to cover debts and expenses that he appropriate investments to the widow.  This means that from that date she is the beneficial owner.

 

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By susanna russell-smith
09th Jan 2016 13:17

@pauljohnston

No, what I was saying is that by transferring shares on 5/4/16 from the spouse expected to live to the spouse expected to die, not only will the living spouse's income from those shares be diminished but the dying spouse's income will be increased for 2016/17 pre-death.  

In addition, as Paul Utherone indicated, although the shares will transfer from the living spouse to the dying spouse at the living spouse's original cost, they will obtain an automatic cgt uplft in base value on death to market value at that date (assuming they've been held a while and the stock market rises again from its current low!) and the living spouse takes them back again via the Will at that (hopefully) higher base value.

But of course, using the dying spouse's cgt annual allowance pre-death would also be good. And then, the executors have a full cgt allowance themselves both for the year of death and the two following tax years...

I would be astonished to hear that anyone has ever managed to get grant of probate within 7 days!!!

 

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By pauljohnston
10th Jan 2016 12:39

@sussanna

Thank you.  I misunderstood the transfer.

The CGT annual allowance makes good reading although if there has been an uplift to death, this is probally restricted unless one of the holdings price flies.

Although I said this earlier if the dying spouse has not used an isa in this tax year then a sale and investment in the ISA could be good planing. Since on death there is a revaluation and then the isa is closed but the spouse can increase her isa limit to include that of the deceased spouse.

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By Paul D Utherone
10th Jan 2016 13:32

If the surviving spouse has assets

pauljohnston wrote:

Thank you.  I misunderstood the transfer.

The CGT annual allowance makes good reading although if there has been an uplift to death, this is probally restricted unless one of the holdings price flies.

currently standing at a gain (held for years and value is increased since purchase) then transferring those to the dying spouse at no gain/loss will wash out the gains presently standing on the assets on their death with the uplift to probate value.
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By North East Accountant
11th Jan 2016 08:49

Rebasing to clear out Gains


Don't overlook the opportunity to transfer all assets  to dying spouse, which are rebased to value at date of death, and then transferred IHT free to spouse.

Spouse can then dispose or give away and no Capital Gains Tax.

 

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By flurrymc
11th Jan 2016 13:05

Quirk

There is a quirk in the law to be aware of which involves the share matching rules.

If W gives shares to H, and he than dies within 30 days her disposal and acquisiton will be matched.  Her base cost for the shares will remain her original purchase price.

TCGA'92 s106A

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