Tax Factor
07 May 2010
What to do About Income Tax when Someone Dies
At a time of grief tax is unlikely to be the first issue that springs to mind but notifying H M Revenue & Customs of a death as quickly as possible will avoid problems mounting up and ensure that any refund of tax due to the estate is received promptly. In this article we outline some of the income tax issues that may need to be considered by the Executors or Administrators of a deceased person's affairs.
Notifying HM Revenue & Customs (HMRC) of a death
If the deceased was in receipt of a state pension or benefit then a form provided by the Registrar when the death is registered can be used to notify the appropriate paying authority. Unfortunately there is no such simple process for notifying HMRC and therefore it falls on the Personal Representative (a term which includes both an Executor appointed under the terms of a Will and an Administrator appointed by the Probate Office by ‘Grant of letters of administration') to notify the relevant HMRC offices.
Income Tax
A letter should be sent to the deceased's Tax Office, quoting their National Insurance Number, and Unique Taxpayer Reference (UTR) if they have one, stating the date of death and advising to whom correspondence concerning their affairs should be addressed.
National Insurance
If the deceased was self employed then it is also necessary to notify the National Insurance Contributions Office to ensure that the collection of contributions by direct debit is stopped. The office can be contacted on 0845 915 4655.
Tax Credits
The Tax Credit Office should also be notified if the deceased was in receipt of Tax Credits or if their death will have an impact on claims made by a surviving spouse or partner. The number to call is 0845 300 3900.
Form R27
When acknowledging notification of a death the Tax Office will usually issue form R27 requesting further information such as whether the deceased left a Will, whether any trusts have been established under the terms of this, whether Probate has been obtained and the net value of the estate.
If the deceased was required to complete self assessment tax returns then a return covering the period from the previous 6 April to the date if death will be issued by HMRC. If no tax returns had been required previously then details of any income received by the deceased in that period must also be supplied on the form R27. This will enable HMRC to determine whether a repayment of income tax is due to the estate. Form R27 requires the claimant of any refund to state the grounds on which they are entitled to receive this e.g. as Executor, widow or widower or other relation or in their capacity as Executor or administrator.
HMRC may ask for further evidence of entitlement in order to be certain that the refund is made to the correct person. This is for the claimant's protection as unfortunately there have been instances in the past of fraudulent claims being made by individuals using information gleaned from death notices contained in the local newspapers.
The Personal Representative must ensure that any refund of income tax due to the estate has been claimed or any outstanding tax liability has been settled before the distribution of the estate to the beneficiaries is completed or they will become liable themselves for any tax payable.
It is not necessary to wait until the end of the tax year in which the death occurs to submit a return or make a claim for repayment. To assist with bringing matters to a conclusion HMRC will, on request, give written confirmation if they have no intention of enquiring further into a deceased person's tax affairs.
Period of administration
If the estate is quite large and/or consists of a number of assets it may take some while to distribute everything to the beneficiaries, particularly if assets, such stocks and shares or the deceased's home, need to be sold. In the meantime income, such as dividends, interest and perhaps rental income may continue to arise. This is no longer income of the deceased but neither is it yet income of the beneficiaries.
Where there is a significant amount of income arising during this ‘period of administration' then HMRC may require the submission of tax returns showing the income that has arisen. The Personal Representative is responsible for completing and submitting these returns and for paying any tax due out of the income received.
When the net income is paid out to the beneficiaries, either when the estate is finally wound up or as an interim payment, tax at the dividend and basic rates will already have been accounted for. If the recipient is a non-taxpayer they may be able to claim a repayment of tax whereas higher or top rate taxpayers will have further tax to pay. The Personal Representative is required to supply each beneficiary with details of the amount of income paid out to them and the tax already accounted for on this. Form R185 (available for download from HMRC's website) can be used to provide this information, which the beneficiary will need to complete his or her own tax return.
In a more straightforward situation, for example when all the deceased's assets pass to his or her surviving spouse, HMRC are usually happy for all the income arising after the date of death to be declared on the beneficiary's tax return as if it had been received in their own name.
If assets are sold, there may be a liability to Capital Gains Tax arising and we will look at the rules for computing the gain or loss and who is liable for payment of the tax due in a later edition of The Tax Factor.
Determining who is liable for tax on income arising in the period following a death can be quite complicated; particularly if trusts have been established under the terms of the Will. Personal Representatives should therefore seek professional advice to ensure that they have met all their responsibilities in this regard.
