Executors and Taxes

An executor of an estate is personally responsible for his or her actions, so as well as there being significant duties, on occasions the role can also involve significant risks. One example of this would be where an executor completes the estate administration and distributes the assets only to find that there was an unknown liability of the deceased, or an estranged relative brings a claim for financial provision to be made for them under the Inheritance (Provision for Family and Dependants) Act 1975.

One of the principal duties of the executor is to ensure that the tax affairs of the deceased person are properly wound up. Normally, this involves submitting a tax return for the deceased which covers the period from the previous 6 April until the date of death. However, if the deceased person’s tax affairs were not up to date, tax returns for the ‘missing’ years may need to be completed.

The executor will also be responsible for submitting an estate tax return or returns for the period of the administration of the estate. This will not normally be required by HM Revenue and Customs (HMRC), however, if the following criteria are met:

• The gross value of the estate is less than £2 million;
• The total tax liability for the whole of the period of administration is less than £10,000;
• The gross proceeds of sale of capital assets is less then £2.5 million in any one tax year;
• The estate is not regarded by HMRC as a ‘complex estate’; and
• The estate administration is completed within two years.

In such cases, a simple summary will suffice, with any tax being paid once HMRC have issued a payslip. Where the income from an estate is very low, HMRC will often waive the need for any filing to be made.

The tax rules applicable to estates are not identical to those that apply to individuals, so if there is significant income or capital gain, or the estate administration period is extended, it is essential to obtain professional advice.

It should also be noted that where a beneficiary inherits an income-producing asset, the income produced by that asset is attributable to the beneficiary from the date of death of the deceased, not from the date that the asset is formally transferred to them from the estate. In this case, the executor of the estate is responsible for paying tax on the income for the period prior to the asset transfer and will withhold basic rate tax on it. The income only becomes assessable on the beneficiary when it is actually received.

The person or persons entitled to the balance of the estate after specific bequests have been made are the ‘residuary legatees’. They are taxed on any estate income passed to them in the relevant financial year. In the year the administration of the estate ends, they will be taxed on the income they have received and the accrued undistributed income.

The above is a somewhat simplified outline of how the estates of deceased persons are taxed.