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Last updated: 15 Jul 2021
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Executors – can your estate follow the informal procedure for estate taxes?

Like individuals and trustees, self-assessment rules also apply to personal representatives (PRs). This means if a tax return has been issued or there’s tax to pay (unless it’s on interest and less than £100 each tax year), then a tax return will need to be submitted.

Although PRs are aware that inheritance tax forms may need to be prepared when administering an estate, they often overlook the requirement to report income and capital gains tax. Or, they find that it becomes apparent when the estate comes to an end.

Even though under normal circumstances tax returns would be required, a simplified informal procedure can be adopted instead where an estate is classed as non-complex. In this case, the PRs only need to report income and gains by letter at the end of the administration period under the deceased’s usual tax reference number. The tax is then paid in one sum, and there’s no interest or penalty if paid ‘late’.

About the author

Mary Hase

+44 (0)20 7556 1328
hasem@buzzacott.co.uk

Although PRs are aware that inheritance tax forms may need to be prepared when administering an estate, they often overlook the requirement to report income and capital gains tax. Or, they find that it becomes apparent when the estate comes to an end.

Even though under normal circumstances tax returns would be required, a simplified informal procedure can be adopted instead where an estate is classed as non-complex. In this case, the PRs only need to report income and gains by letter at the end of the administration period under the deceased’s usual tax reference number. The tax is then paid in one sum, and there’s no interest or penalty if paid ‘late’.

An estate will qualify if...

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?

What if a residential property is sold?

Even when using the informal procedure, the 30-day Capital Gains Tax (CGT) reporting requirements are the same as those for a complex estate. 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 30 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 30 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

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 30-day CGT reporting, in addition to providing tax services for formal and informal estates.

Get in touch 

For specialist advice tailored to your unique circumstances, fill out the form below and one of our experts will be in touch to discuss how we can work together.

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