Administration of Estates – “the T word”

There are 3 taxes relevant to the administration of Estates and Inheritance Tax is an enormous number of blogs, so for now I’m not going to tackle it. This series has been about non taxable estate.

So what are the other 2? Capital Gains Tax and Income Tax and I’m going to take these each in turn, starting with income tax.

When someone dies, they are entitled to a full allowance for a year for income tax, even though they have probably died part the way through the income tax year. This often means that as someone has had income for part of the year and an allowance for the whole year that there is an income tax refund.

An income tax return (R27) therefore needs to be completed and sent to HM Revenue & Customs. This is a task completed usually towards the end of the administration of the estate. Therefore all forms of income of the deceased need to be established and therefore the income received and tax paid up to the date of death need to be ascertained.

HM Revenue & Customs are usually fairly prompt in processing the income tax return and if required, sending back the income tax refund.

One of the key aims of dealing with all the taxes is to get HM Revenue & Customs to close their file on the deceased’s affairs, so at the end of dealing with all of the tax affairs, the question should be asked about HM Revenue & Customs closing their file.

There is further income earned after the death of the deceased and before the estate is distributed. Again this information needs to be collated, with the income received and the tax paid (if any). When the estate is distributed, an (R185) form needs to be completed and given to each beneficiary as necessary, as they get the benefit of the distribution and the benefit of any tax paid. The beneficiary then uses this form in respect of their own tax affairs.

If there are any issues regarding tax, the standard advice would be to go and seek professional advice. Tax is a tricky area and there are penalties if the Executors get it wrong, so it is probably better to be safe than sorry and take advice on the tax position.