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Complications for deceased estates

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5th Aug 2016
Tax Writer Taxwriter Ltd
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The savings allowance and dividend allowance are not available to trustees or estates of deceased persons. This is causing problems for trustees and personal representatives.

Income of the estate 

When an estate of a deceased person receives taxable income during the period of administration (i.e. after death but before the residue is ascertained and ready for distribution), that income is taxable at the basic rate; 20% on interest and 7.5% on dividends.

The personal representatives (PR) are not entitled to a personal allowance, savings allowance, dividend allowance or savings rate band, so in theory every penny received is taxable. The PRs should inform HMRC, and complete an SA tax return to pay the tax due on the interest or dividends received. This would impose a significant administrative burden on small estates where the only income to report is a small amount of bank interest or dividends.

Interest

To prevent the need to issue and a process tax returns showing small amounts of interest HMRC has announced a concession – buried in the April 2016 edition of the Trusts and Estates newsletter (see “collection and management”).

For 2016/17 HMRC will not require trustees and PRs to notify them of taxable interest received, where the tax due on that interest is less than £100 for the year. This gives the PRs an effective savings allowance of £500. It is expected that this concession will be codified in the Finance Bill 2017.

Dividends     

There is no similar concession for dividend income. All dividends received by the deceased estate on or after 6 April 2016 are taxable in the hands of the PRs at 7.5%.

When the net dividend income received by the estate is distributed to a beneficiary, the cash amount must be grossed up at 7.5% and carry a repayable credit for the tax deducted at that rate. The form R185 (Estate Income) will be revised shortly, but meanwhile Box 18 on the current form may be used to show the position.

The situation complicated where the estate has received dividend income in 2015/16 or earlier, then distributes that income in 2016/17 or later. HMRC’s current position is that the 10% non-repayable tax credit for 2015/16 and earlier years may be used to frank the applicable tax rate of 7.5% in 2016/17. However this tax credit can only be set-off against a beneficiary's tax liability at the standard dividend tax rate of 7.5%.

Example

Income received and paid out in 2015/16

The estate receives £1000 of dividend income which is treated as a gross dividend of £1111.11. The estate is taxed at 10% on the gross dividend; the tax credit covers the tax charged and no tax is payable.

When £1000 of dividend income is paid out to the beneficiary, he is treated as receiving a gross dividend of £1111.11 with a tax credit of £111.11. If the beneficiary is a basic rate taxpayer there is no further tax to pay.

Income received and paid out in 2016/17

The estate receives £1000 of dividends, and is taxed at 7.5% on that gross dividend, so the PRs must pay £75 to HMRC.

When the net dividend income of £925 is paid out to the beneficiary, he is treated as receiving a gross dividend of £1000 with a repayable tax credit of £75 withheld.

If the the dividend income falls within the beneficiary's £5,000 dividend allowance, he can reclaim the £75 tax withheld and paid to HMRC by the PRs. If the beneficiary is a basic rate taxpayer, there is no further tax to pay. If the beneficiary is a higher rate taxpayer he must pay 32.5% x £1,000 = £325 less tax credit of £75 withheld by the PRs, leaving £250 to pay.

Income in 2015/16 paid out in 2016/17

The position is complicated as there are no transitional rules, although we are expecting some amendments to be made to Finance Bill 2016 to clarify the issue for trustees and PRs.

The position of the PRs of a deceased estate is summarised below. The tax credit deemed to be added to the dividend in 2015/16 franks the basic rate tax due by the PRs in that year. The dividend paid out in 2016/17 is grossed up by 7.5% to £1081.08.

If the beneficiary is a basic rate taxpayer, or the dividend income falls within his £5000 dividend allowance, there is no further tax to pay, and he can’t reclaim the tax credit. If the beneficiary is a higher rate taxpayer he must pay 32.5% x £1081.08 = £351.35 less tax credit of £81.08, leaving £270.27 to pay.

Box 21 of the current form R185 (Estate Income) should be used on an interim basis to show a non-repayable tax credit.

PRs position

2015/16

Tax credits

£

Dividend received in cash

 

1000

Tax credit @ 10% of gross: 1/9 x net

111.11

 

Tax due @ 10%

(111.11)

 

Tax payable to HMRC:

Nil

 

2016/17

 

 

Dividend paid out to beneficiary

 

(1000)

Tax credit added @7.5%

(81.08)

 

Income deemed received by beneficiary

 

1081.08

This article has been amended to correct the example for dividends received and paid out in 2016/17.

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Replies (9)

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By SteveHa
08th Aug 2016 10:03

Out of curiosity, in your first example, if the beneficiary receives no other dividends in the year, and so the dividend paid is covered by the dividend 0% rate band, will that beneficiary be able to claim a repayment of the £111.11, effectively securing a refund of the old non-repayable dividend tax credit?

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Replying to SteveHa:
rebecca cave
By Rebecca Cave
08th Aug 2016 14:08

No. The non-repayable dividend tax credit is just that - not repayable, recalimable or refundable.

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By gbuckell
08th Aug 2016 11:03

Is the 2016/17 example correct? Based on my reading of the article, if the estate receives a dividend of £1,000 then it is liable to tax at 7.5% or £75. The beneficiary receives £925 with a credit of £75 which he can reclaim if within his £5,000 allowance.

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Replying to gbuckell:
rebecca cave
By Rebecca Cave
08th Aug 2016 17:46

I have corrected the 2016/17 example, and I'm seeking further clarifcation from HMRC on the example of income received in 2015/16 but paid out in 2016/17.

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Replying to Rebecca Cave:
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By emanresu
10th Aug 2016 19:49

taxwriter wrote:

I have corrected the 2016/17 example, and I'm seeking further clarifcation from HMRC on the example of income received in 2015/16 but paid out in 2016/17.

I didn't see the uncorrected article, but isn't the £975 in the corrected version the one that should have been corrected?

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rebecca cave
By Rebecca Cave
09th Aug 2016 16:38

Having discussed this issue with my learned friends, we have concluded that the law is ambiguous, and HMRC guidance is required on thier intepretation of the treatment of dividend income received by an estate in 2015/16 but paid out in a later year.

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By P2
10th Aug 2016 15:10

Are any dividends that are declared on investments lying within ISA wrappers protected from this treatment? Do the investments become "unwrapped" on death? Please clarify. Thanks.

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By CJMaslen
10th Aug 2016 16:50

No doubt the Chancellor and his advisers at the Treasury considered all these aspects - and the previous ones about crossing rate bands - when they decided to introduce these provisions. I thought the strategy was supposed to be to simplify our tax system.

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By AndrewV12
19th Nov 2016 15:02

Extract above
'When an estate of a deceased person receives taxable income during the period of administration (i.e. after death but before the residue is ascertained and ready for distribution), that income is taxable at the basic rate; 20% on interest and 7.5% on dividends.'

When some dies and with all of the issues associated with a dealt, does the taxation of estate Dividends and Interest really mater. Though I do agree, asking the PR to fill in tax returns for such matters is a bit much, lets treble the filing thresholds.

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