15 Dec 2016

Recent developments in the administration of estates

We all know that anything and everything relating to tax rules presents a ‘moving target’, that new legislation and procedures are implemented on a regular basis, year in year out. This article highlights a couple of the recent developments relating to the administration of estates.

Collection and management of taxes

From 6 April 2016 banks, building societies and National Savings and Investments no longer deduct tax on the interest they pay to customers at source. The interest is instead paid out gross, and it falls to the recipient to account for any tax payable.

This is of obvious benefit to individuals: anyone who is entitled to receive interest tax-free no longer has to apply for a refund of tax deducted from interest payments made to them. An individual has the benefit of their Personal Allowance, a new Personal Savings Allowance (£1000 for a basic rate taxpayer) and a starting rate for savings which allows them to receive up to £5,000 of interest tax-free, and the Government anticipated that following these changes around 95% of taxpayers will pay no tax on their savings income.

The new rules, by contrast, make the situation for Personal Representatives (PRs) more onerous. They are entitled to none of these allowances, and will be taxable on any and all interest received. Moreover, the consequences of the new rules for them will, in many cases, be to create additional administrative burdens. Some PRs who previously did not need to complete a tax return or make informal payments to HMRC may find that by receiving gross interest they have new reporting burdens to bear.

Before the changes were implemented, HMRC had already received feedback alerting them to the potential additional burdens being imposed on PRs, and consequently they introduced some transitional measures. For the tax year 2016-2017 HMRC have not required notification from PRs dealing with estates in administration where the only source of income is savings interest and the tax liability is below £100. HMRC confirmed in April 2016 that they “are currently reviewing the situation longer term” with a view to letting customers know about arrangements from 6 April 2017 onwards before the new tax year commences. We await further information.

Taxation of dividends

The rules on the taxation of dividends have also changed this year. Dividend income is now paid out gross, and there is no longer a dividend tax credit. Once again, individuals benefit whereas PRs do not. From 6 April 2016, an individual pays no tax on the first £5,000 of dividend income and dividend income above that amount is taxed at specified rates relating to the usual tax bands. PRs have no equivalent tax-free element of dividend income, and will, as with savings interest, pay tax on any and all dividends received. There is no equivalent relaxation of the reporting rules to that allowed by HMRC for savings interest income, so the receipt by an estate of any gross dividend income will now oblige an income tax return to be filed.

Reporting obligations of PRs and the question of gifts made in the seven years before death

Following someone’s death it is the responsibility of their PRs to ensure that the right amount of tax is paid. As a consequence, they need to report to HMRC any relevant gifts that the deceased may have made in the seven years before they died. Such a gift may be taxable in itself (depending on how many years before the death it was made) or its existence may have a bearing on the calculation of the tax payable on the value of the estate left in the hands of the deceased.

The nature of this disclosure of gifts means that PRs are expected to make extensive enquiries, seeking information from family members, friends, associates, those named in a Will and any solicitors, accountants and financial advisors the deceased may have instructed. It is even recommended that PRs peruse seven years’ worth of bank and building society accounts to identify any such potential gifts.

HMRC believe that in the majority of cases these gifts are reported to them correctly. If, however, it becomes apparent that a gift has not been properly declared and there is additional IHT to pay after it comes to light, then there might also be interest and penalties to pay. If the PRs have failed to make all relevant enquiries, they might be required to pay these penalties.

The PRs’ duty to enquire, however, is not limitless. The recent case of Hutchings v HMRC [2015] UKFTT 9 (summary available here) confirmed that where a son had failed to tell his father’s PRs about a substantial gift he had received from the deceased the court agreed it was the son who should pay the penalty arising from the non-disclosure. The case is useful in showing the lengths PRs are expected to go to in discovering all assets and gifts of the deceased.