Executors – can your estate follow the informal procedure for estate taxes?

An estate will qualify if:

• the total income tax and capital gains tax due for the administration period was no more than £10,000
• the estate was worth no more than £2.5 million at the date of death
• the proceeds of assets sold in any one year are no more than £500,000

At the end of the administration period, PRs write to HMRC advising them of the tax due which they pay at the same time. This approach enables PRs to keep the costs of administration down as well as making the role less onerous on themselves.

Where the above criteria isn’t met, the estate is considered ‘complex’ and the PRs will need to register the estate on HMRC’s Trust Registration Service to obtain a Unique Taxpayer Reference Number for the estate. They’ll then need to submit tax returns for the period from the date of death to 5 April and subsequent years, until the tax year in which the administration period comes to an end. 

In some instances an estate may meet the informal estate criteria in the earlier years, and it isn’t until the executors come to sell assets later that they find the value has increased and the proceeds are greater than £500,000. In this case, not only is a tax return required for the year of disposal, but also the earlier years.

What if a residential property is sold?

Even when using the informal procedure, the 60-day Capital Gains Tax (CGT) reporting requirements are the same as those for a complex estate. This deadline was 30 days for sales completing before 27 October 2021 and was increased in the October 2021 Autumn Statement. Where an estate which qualifies for the informal procedure sells a UK residential property, and tax due is above the annual CGT exemption, HMRC has confirmed that the PRs need to report the sale on the CGT property disposals online service and pay the CGT within 60 days.

What should be a relatively straightforward and cost-effective method of administering an estate could turn out to be anything but, where UK residential property is sold. 

The exception to this is where the estate will be finalised within the 60 days following the sale and can be reported by letter. A loss or gain within the annual CGT exemption does not have to be reported. The PRs will need to create an account in their own name to report the estate’s gain together with any gains they make in a personal capacity.

According to HMRC, an estate does not need to register on the Trust Registration Service to use the CGT property disposals online service, nor does it need a Unique Tax Reference (UTR) number. Alternatively, the PRs may be able to pass the property to the beneficiaries to sell and report themselves thereby making use of their own annual CGT exemptions. 

How we can help

Our specialists are able to advise on whether an informal procedure can be used as well as assist in the drafting of the letter to HMRC. We can also support you in preparing tax returns for the estate where complex. For those with residential property, we are able to assist PRs with 60-day CGT reporting, in addition to providing tax services for formal and informal estates.