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Death and taxes – personal representatives

November 2017: Robin Williamson provides some advice on what personal representatives need to know when it comes to income tax and capital gains on estates of the deceased. He goes into detail about the tax position of the personal representatives, notifiying HMRC, penalties, CGT private residence relief, marriage allowance, and the position of the survivor

This article contains some practical tips for personal representatives (PRs) dealing with the income tax or capital gains tax (CGT) aspects of the estate of a deceased person, and details of the contribution-based benefits claimable by the survivor of a married couple or civil partnership.

Notifying HMRC

It is now in most cases possible to arrange for HMRC, the Department for Work and Pensions (DWP) and most other government departments (eg, the Passport Office and the DVLA) to be notified of a death at one and the same time through the Tell Us Once (TUO) service which is available in most parts of England, Wales and Scotland. Normally the registrar will offer the service to anyone registering a death, but it can also be accessed here. In Northern Ireland the Bereavement Service offers bereaved relatives a single point of contact for the Social Security Agency but not for any other department.

If TUO is not used or not available, the PRs must themselves notify HMRC of the death via the bereavement helpline 0300 200 3300 (textphone 0300 200 3319) (from abroad +44 (0) 135 535 9022).

After being notified via TUO, HMRC should make contact with the PRs to settle the deceased’s tax affairs. If this does not happen, the PRs may themselves have to initiate contact. Even if HMRC does respond, the PRs should still check that the information on which any assessment or repayment is based is correct.

For PRs administering the estate themselves, there is a useful checklist which is adequate for straightforward cases. The Low Incomes Tax Reform Group (LITRG) has also published a Tax at bereavement factsheet which is available here.

Tax position of the personal representatives

The PRs (who may be executors, if the deceased left a will naming them as such, or administrators if there is no will) are responsible to HMRC for settling the tax affairs of the deceased, as well as for reporting and paying any tax liability arising during the course of the administration of the estate.

It is worth noting that because banks and building societies no longer deduct tax at source from most payments of interest, PRs who before 6 April 2016 might not have had to file a return may now be obliged to do so – but HMRC has announced that for 2016/17 and 2017/18 at least, if interest is the only source of estate income and the tax liability is less than £100, it is not obligatory to file a return. HMRC can assess the PRs for any income tax or CGT owed by the deceased, but the PRs may deduct any payments they make to HMRC from the estate (s74(1), Taxes Management Act 1970 (TMA 1970)).

HMRC must raise any such assessment on the PRs within four years after the end of the year of assessment in which the death occurred (s40(1), TMA 1970). This is so even if the deceased (or an agent acting on the deceased’s behalf during his or her lifetime) had carelessly or deliberately brought about a loss of tax, so incurring a potential six-year or 20-year time limit for assessment; but in such cases HMRC may assess the PRs – within that four-year time limit – for any year of assessment ending no earlier than six years before the death (s40(2), TMA 1970).

For example: Fred deliberately concealed from HMRC an offshore gain which arose in 2010/11. He died on 1 May 2016. Because the gain arose in a year of assessment ending within six years before Fred’s death, HMRC may assess his PRs to tax at any time up to and including 5 April 2021.

Penalties and PRs

HMRC’s Compliance Handbook, paragraph CH301150, states: “You must not impose a penalty on the personal representatives of the deceased person for offences committed by the deceased before the date of death, if all the following circumstances apply:

  • the penalty is of the type that are classified as ‘criminal’ for the purposes of European Convention on Human Rights, see CH300200, and
  • it is necessary to establish that the person’s behaviour was careless, deliberate or dishonest, or that they did not have a reasonable excuse, and
  • they would have been personally liable for the penalty.

“Where an inaccuracy, failure, wrongdoing or dishonest conduct in respect of the deceased person’s estate is attributable to the personal representatives after the person’s date of death, you should impose any penalty on the personal representative in the normal way.”

CGT private residence relief

Personal representatives can claim principal private residence relief for CGT purposes in respect of a dwelling which, both before and after the death, was occupied by one or more individuals who are entitled to 75% or more of the net proceeds of disposal (s225A, Taxation of Chargeable Gains Act 1992).

Marriage allowance

While PRs represent the deceased for most purposes, that is not the case with the transferable marriage allowance, for which one of the main conditions is that the parties are married to, or in a civil partnership with, each other at the time the claim is made (s55C(1)(a)(ii), Income Tax Act 2007). Thus the PR of a deceased spouse or civil partner cannot elect on the deceased’s behalf to transfer part of their personal allowance, because the marriage or civil partnership subsists only while both parties are alive. This rule causes some resentment in cases where the survivor could have benefited from such a transfer but does not find out about the possibility until after their partner’s death. This issue features prominently in LITRG’s postbag and we have drawn the anomaly to the attention of HMRC and government, but so far to no avail.

Another claim which the PRs cannot claim on behalf of the deceased is for an asset becoming of negligible value and generating a capital loss.

Position of the survivor

A death can change the lives of the survivors in all sorts of ways, particularly a partner or child of the deceased, and not just in respect of their tax affairs. The surviving spouse, civil partner or cohabitee of the deceased may find they are in receipt of income owing to the deceased (eg, by way of a pension) as well as their own, although that may result in their becoming a taxpayer when they were not one before. Similarly, where the deceased and the survivor were married to or civil partners of each other (but not where they were unmarried partners, although permission has been given for a case to be appealed to the Supreme Court on grounds of discrimination), the survivor may be able to claim contributory bereavement benefits if the deceased paid sufficient national insurance contributions or died as a result of a work-related illness or accident.

The rather complex benefits arrangement that applied where the death pre-dated 6 April 2017 involved a tax-free lump sum (bereavement payment) accompanied by taxable monthly payments: either widowed parent’s allowance payable until child benefit ceased to be payable in respect of the youngest child or the surviving parent remarried or cohabited, or bereavement allowance payable for 52 weeks. That has been replaced by a bereavement support payment (BSP) for deaths on or after 6 April 2017. The BSP, which is non-taxable, consists of a lump sum of £3,500 for those with children under 20 in higher education or training, otherwise £2,500, and monthly payments of £350 or £250 respectively for 18 months. BSP continues to be payable even if the surviving parent remarries or cohabits.

Those still in receipt of pre-April 2017 benefits must declare the payments as income for tax credits purposes, unless they fall within the £300 disregard applicable to the category of ‘pension income’. If and when universal credit (UC) replaces tax credits, the situation will become somewhat bizarre. This is because bereavement allowance and widowed parent’s allowance count as unearned income for UC, and are therefore deducted from the UC award pound for pound. Therefore, the fact that they are taxable means that the UC claimant could be made worse off by claiming them, for not only is 100% of the benefit deducted from the UC award, but tax on it remains payable at the claimant’s marginal rate.

About the author

Robin Williamson is technical director at the Low Incomes Tax Reform Group of the CIOT.