SALF806 - Other issues: assessment, employees, trustees, personal representatives and beneficiaries of estates: self assessment for personal representatives and the beneficiaries of estates

Self assessment for personal representatives

Self Assessment procedures apply

Section 8 TMA

Personal representatives are responsible for making a return of any income, profits or gains arising to an estate and for paying any income tax or capital gains tax that is due. They must deduct tax from all estate income at the basic rate (or equivalent investment rate on interest and the dividend rate for dividend income) before distributing the income to beneficiaries.

All the ‘process now-check later’ procedures of self assessment apply to personal representatives. For example, the Trust and Estate tax return includes a self assessment which may be subject to correction and enquiry in the normal way, and the same fixed time scale for filing the tax return and for the payment of tax apply.

It should also be noted that in addition to the tax return required from the personal representatives covering the liabilities of the estate, they may also be required to supply information relevant to the tax liabilities of the beneficiaries of the estate. They should use form R185 (Estate Income) to notify the beneficiary of their income from the deceased’s estate for the year and the tax paid on that income.

Self assessment for beneficiaries

Self Assessment procedures apply

Chapter 6 Part 5 ITTOIA

But the tax arising on the income from the estate of a deceased person is also accounted for in the hands of the beneficiaries. The beneficiaries who have an interest in the estate should enter the income attributed to their share of that interest on their personal self assessment tax return, but, because to those beneficiaries of UK estates this income is taxed income, the associated tax credit should also be entered in their personal self assessment tax return.

This procedure means that a beneficiary who is a higher rate taxpayer will be liable to further tax on his or her share of income from the estate. Other beneficiaries may have no further liability, or may be entitled to a repayment of part, or all, of the associated credit, depending on their individual circumstances.

In general terms all the ‘process now-check later’ procedures of self assessment apply to both personal representatives and to the beneficiaries of estates, but there are special rules for beneficiaries with an interest in the residue of an estate.

Self assessment for residuary beneficiaries

The ‘residue’ of a deceased person’s estate is the amount remaining after the payment of any debts, specific legacies and other outgoings. Any income arising on the residue of the estate is attributed to the beneficiaries with an interest in that residue.

The beneficiaries are taxed on the lower of either:

• sums paid out to them from the estate in the year of assessment, or
• the amount of income that has arisen on their share of the residue.

Limited interests

ITTOIA/Sections 654 and 661

Beneficiaries, such as life tenants, who are entitled to have the income, but not capital, of the estate paid to them are said to have a ‘limited interest’ in the residue. Under Self Assessment they are liable to tax on payments made to them out of an estate. Any such payments are treated as payments net of tax at the appropriate rate (either the basic rate, or, for payments out of dividends, the lower rate). This means that beneficiaries who are non-taxpayers, or lower rate taxpayers, are entitled to a repayment of some or all of the tax. Higher rate taxpayers will have additional tax to pay.

If, on completion of the estate, any amounts to which the beneficiary is entitled remain unpaid they will be deemed to be income of the year of assessment in which the estate is wound up.

Absolute interests

ITTOIA/Sections 652 and 660

Beneficiaries who are entitled to a share of the whole or part of the income and capital of the residue are said to have an ‘absolute interest’ in the residue. Under Self Assessment they are liable to tax on payments made to them out of the estate. Any such payments are treated as income of the year of payment, and again any such payments are treated as payments net of tax at the appropriate rate.

But any such payments are only treated as income to the extent that they do not exceed the ‘aggregated income entitlement’ of the beneficiary at the time the payment is made. The ‘aggregated income entitlement’ is the cumulative share of the estate income, for all years up to and including the year of payment, to which the beneficiary is entitled whether or not that share has actually been paid out. In other words the beneficiary is liable to tax on the lesser of the cumulative share of estate income, or the amounts actually paid to them.

At the end of the administration any part of the beneficiary’s ‘aggregated income entitlement’ that remains unpaid is treated as paid immediately before the end of the administration period. So beneficiaries are charged on the whole of their share of the estate income even if it has not been paid to them when administration is completed.

If, when arriving at the beneficiary’s share of estate income, there is an excess of expenses over income that excess is carried forward and deducted in the following year. Similarly if the ‘benefits received’ from the estate fall short of the beneficiary’s estate income that income is reduced by the shortfall in the year in which the administration ends. Benefits received in this context include sums paid on completion of the administration.

Successive interests in residue

ITTOIA/Sections 671-676

‘Successive interests’ in residue can be held where an interest is disclaimed or varied by the original beneficiary. The subsequent interest is treated as having always existed and held by the beneficiary entitled to receive the payment when it is made. So, if a beneficiary receives a payment for a period before his or her interest came into being it is treated as his or her income. Payments made in respect of an interest which has ceased are likewise treated as the income of the person entitled to them. The result is that each beneficiary is assessed only on the income paid to them.

Different rules apply where a life interest is terminated by death. Any sums paid after the beneficiary has died are treated as his income for the year of assessment in which the interest ceased.

Statement by personal representative

ITTOIA/Section 682A

Each beneficiary may request a statement from the personal representatives of the amounts deemed to be paid as income and the tax deducted, distinguishing between tax at lower and basic rates. The personal representatives are required to provide any such statement if one is requested.