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Death of sole trader using cash basis

What happens to any debtors / creditors when a sole trader dies and has used the cash basis

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I'm helping a friend complete the SA 100 for her husband who died suddenly. He was a sole trader and therefore the business ceased on his date of death (she has no intention of even trying to 'take over' the business). He was using the 'cash basis' accounting. On the date of his death there were some outstanding invoices, both sales and purchases, that have yet to be paid (these don't amount to much money) . Should a provision be provided for in the 'cash basis' accounts for both the income and expenses owing (as with traditional accounting), or does this 'income' this now become part of his estate and the 'expenses' therefore need to be paid from his estate? So, only the 'income' actually received and 'expenses' actually paid up to the date of death be included on his final tax return.

Thank you in advance for any help.

 

Replies (7)

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By Paul Crowley
30th Sep 2020 08:29

Wait until all owed both ways are paid
Add them to money received and paid in the accounts

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By Tax Dragon
30th Sep 2020 09:03

BIM70025 and BIM90030 are worth a look.

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RLI
By lionofludesch
30th Sep 2020 09:46

Same rules as any other cessation, broadly.

All debtors and creditors crystallise at the date of death.

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By richard thomas
30th Sep 2020 11:28

It probably makes no difference whether you include the actual post-cessation receipts and expenses in the final accounts and SA103 pages or treat them as post-cessation receipts, as the BIM pages referred to by Tax Dragon suggest is the strictly correct way, unless the end of a tax year intervenes.

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Replying to richard thomas:
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By Tax Dragon
30th Sep 2020 12:18

I wonder if that's what the BIM pages do say is strictly the correct way [they don't mention death]. (Accuracy warning: I am about to apply logic not knowledge. Chances of error are always higher when we try to work stuff out, rather than looking up what other people have already worked out - and made law.)

But here goes... a deceased person cannot be taxable in tax years after the year of death. So post cessation receipts (etc) cannot be taxable on the cash basis. Lion's point about crystallisation at death is surely right. I suspect that a correct analysis would include a valuation of the debts and liabilities at death and bring the valuation into the accounts (along with the deemed disposal of stock etc). The estate acquires those assets and liabilities and realises - or discharges - them, with tax consequences I would have to look up.

In reality, you'd do what Paul said up front - and which you tacitly acknowledge in your comment. This avoids problems all round (including the need to look up the rules for the estate).

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Replying to Tax Dragon:
RLI
By lionofludesch
30th Sep 2020 12:24

Tax Dragon wrote:

I wonder if that's what the BIM pages do say is strictly the correct way [they don't mention death].

He's ceased trading. The reason for cessation is, surely, irrelevant.

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Replying to lionofludesch:
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By Tax Dragon
30th Sep 2020 12:40

Then doesn't BIM90020 mean all of us are wrong? The strict way of doing it is to tax the estate? (Though AFAIK the estate isn't a person, so more reading may be required.)

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