Tax reporting for simple and complex estates

Of equal importance, is reporting any income tax and capital gains tax liabilities that arise during the administration period. The administration period starts on the date of death of the individual and ends on the date that the “residue” of the estate is ascertained. The administration period can run for several years if the affairs of the deceased are not straight-forward.

There are two ways that the estate’s income tax and capital gains tax liabilities can be reported to HMRC. Each method depends on whether the estate is regarded as ‘simple’ or ‘complex’ according to Revenue rules.

There are three questions that determine if an estate is ‘simple’ or ‘complex’:

• Was the estate valued at more than £2.5million on the date of death?
• Does the estate owe income tax and capital gains tax totalling more than £10,000?
• Did the executors sell assets valued at more than £500,000 in a single tax year?

When reviewing whether the estate has sold assets valued in excess of £500,000 in a single tax year, please bear in mind that this includes assets that are not liable for capital gains tax, such as ISA investments.

If the answer to all of these questions is ‘NO’, then the estate is classified as ‘simple’. The tax owed by a simple estate can be reported by writing to HMRC at the end of the administration period. HMRC write back and provide the executors with a payment reference number and payment due date and the whole liability can be settled in one lump sum.

From 6 April 2024 onwards, executors do not need to report an estate’s income tax liability to HMRC if the amount of tax owed is below £100 for every tax year of the administration period (taking into account all sources of taxable income).

If the answer to any of the questions above is ‘YES’, then the estate is complex. The executors will need to register the estate with HMRC who will issue a Unique Taxpayer Reference (UTR) and a notice to file an estate tax return for each tax year during the administration period. The registration process is  done online using HMRC’s Trust Registration Service, (you will need a Government Gateway account to do this). Tax returns must be filed and all tax paid in accordance with self-assessment deadlines. You can appoint an agent to undertake this for you.

The estate’s tax affairs are assessed by HMRC separately from those of the deceased individual. The first tax return will cover the period from the day after death until the following 5 April, if there is a tax liability to report for that year. Subsequent estate tax returns will cover the full tax year. A final estate tax return will cover the period from 6 April until the date that the administration period ended. The final tax return is usually submitted to HMRC with a request for early clearance from any enquiries, otherwise HMRC will have 12 months from the filing date in which to raise an enquiry, and the executors will not be able to make final distributions to the beneficiaries of the estate until that enquiry window has expired.

Beneficiaries entitled to a share of the residue of an estate, are personally liable for tax on their share of the income received during the administration period. Personal representatives must provide each beneficiary with a Statement of Income (form R185) for each tax year in which a ‘sum’ is paid to them. The R185 will enable each beneficiary to report their share of the estate income to HMRC in a tax return or tax repayment claim, if they complete one. A ‘sum’ includes cash, assets transferred or appropriated, and debts set off or released to the beneficiary. The amount of income to be included on the R185 is the lower of the income received (net of basic rate tax paid by the estate to HMRC) and the ‘sum’ distributed to the beneficiary. Any excess income is carried forward to the next tax year. If no ‘sum’ is distributed to a beneficiary in a tax year, the net income for that tax year is carried forward and included on the R185 for the next tax year in which a ‘sum’ is distributed. The R185 for the year in which the administration periods ends will include all income not included on an R185 for previous years.

Our team of experts are experienced in dealing with all aspects of estate administration and would be pleased to help prepare estate tax returns and calculate the estate’s income tax and capital gains tax liabilities.