Tax on deceased estate

[BellaHubby]

Dad died in June and brother and I are sorting out his estate. We are joint executors of the will, and joint beneficiaries. In principle, there's not a lot to do, just a house to sell and a few bank/savings accounts, all well within the IHT limit. Dad's income was just the state pension and a trivial works pension, and he was well within the HMRC personal allowance so paid no tax. We've now got probate and closed his bank accounts. Closing the accounts produced an interest of about £2500.
We're not clear if there is any tax due on this interest, seem to read conflicting stories. For sure, brother and I have ownership since probate and closing the accounts, but is there any tax due between dad's death and probate? Since dad died in the current tax year, is his personal allowance still valid for this financial year?
Hope that all makes sense

bellahubby

[chas49]

Are you sure about the interest of £2500 in the current tax year - seems a lot for around 3 months?

[DrFfybes]

Are you sure about the interest of £2500 in the current tax year - seems a lot for around 3 months?

More to the point, this seems at odds with...

. Dad's income was just the state pension and a trivial works pension, and he was well within the HMRC personal allowance so paid no tax.

That means a cash savings balance of circa £250k to earn that in 3 months, and he'd certainly be liable for Income Tax. To be honest even full SP puts you pretty close to the Personal allowance these days, the works pension would have to be under £200/month to keep him under the PA.

Check the period the interest applies to, and how much of it was credited before death (your father's income) and after (Estate's income) but unless he had a pile of cashed stashed somewhere I suspect you're misreading the statement.

Paul

[DeepSporran]

Interest of £2500 might have come from multi year fixed term accounts, where it wouldn’t be taxable till the end of the term, or in this case where closed after decease of account holder.

[chas49]

Interest of £2500 might have come from multi year fixed term accounts, where it wouldn’t be taxable till the end of the term, or in this case where closed after decease of account holder.

Though with rates as low as they have been for most of the last few years, the balances would need to have been relatively high...


We'll have to wait for the OP to come back

[BellaHubby]

Interest of £2500 might have come from multi year fixed term accounts, where it wouldn’t be taxable till the end of the term, or in this case where closed after decease of account holder.

That's right, dad had a number of high-interest fixed-term accounts maturing this year or next

bellahubby

[chas49]

It's my understanding that interest credited after death is treated as income of the estate, and the estate does not benefit from a personal allowance or a personal savings allowance so it will be taxable.

[scrumpyjack]

It's my understanding that interest credited after death is treated as income of the estate, and the estate does not benefit from a personal allowance or a personal savings allowance so it will be taxable.

Yes and no. The executor will need to pay 20% tax on the interest, but then at the end of the estate administration issues a form R185(Estate) to the residual beneficiaries showing their share of the estate income and tax paid. The beneficiary includes that income in their tax return and if they don't pay tax will get a refund, or, if higher rate taxpayers, will pay more tax on it.

ps the estate does get a CGT personal allowance for the first 2 years of administration

[BellaHubby]

It's my understanding that interest credited after death is treated as income of the estate, and the estate does not benefit from a personal allowance or a personal savings allowance so it will be taxable.

Yes and no. The executor will need to pay 20% tax on the interest, but then at the end of the estate administration issues a form R185(Estate) to the residual beneficiaries showing their share of the estate income and tax paid. The beneficiary includes that income in their tax return and if they don't pay tax will get a refund, or, if higher rate taxpayers, will pay more tax on it.

ps the estate does get a CGT personal allowance for the first 2 years of administration

Thank you, this forum is wonderful! I think we need to write a letter to Mr Taxman

bellahubby

[Kantwebefriends]

Remember that the interest he received before death can be set against both his Personal Savings Allowance and his Starting Rate for Savings.
So it sounds as if the interest attributed to your father personally will be due no income tax.

[BellaHubby]

Remember that the interest he received before death can be set against both his Personal Savings Allowance and his Starting Rate for Savings.
So it sounds as if the interest attributed to your father personally will be due no income tax.

Yes, that's my understanding. It's the receipt of interest on closing his accounts that is the problem. It's not a big problem but we want to ensure we follow the rules.

bellahubby

[stewamax]

Note that if you have interest that was accrued but was not paid or credited to the account* between the start of the deceased's last tax year and the date of death, but is paid before the estate is wound up, then the interest falls 100% to the estate.
You are not allowed to pro rata it to say e.g. "He died in February, payout was in March, so 11/12ths of the accrued interest goes on the deceased's SATR (and hence set against his personal allowance) and 1/12th to the estate's SATR.


* e.g. fixed-rate bonds with annual interest

[BellaHubby]

Note that if you have interest that was accrued but was not paid or credited to the account* between the start of the deceased's last tax year and the date of death, but is paid before the estate is wound up, then the interest falls 100% to the estate.
You are not allowed to pro rata it to say e.g. "He died in February, payout was in March, so 11/12ths of the accrued interest goes on the deceased's SATR (and hence set against his personal allowance) and 1/12th to the estate's SATR.


* e.g. fixed-rate bonds with annual interest

Thank you. I guessed that would be the case

bellahubby