Common tax mistakes executors make
Acting as an executor can involve a wide range of responsibilities. In addition to dealing with probate and administering the estate, executors must also ensure that the estate’s tax affairs are handled correctly.
Many executors take on the role for the first time and may be unfamiliar with the tax rules that apply during estate administration. As a result, it is not uncommon for tax issues to be overlooked.
Understanding some of the most common mistakes can help executors avoid unnecessary complications when dealing with HMRC.
Assuming tax matters end when someone dies
One of the most common misunderstandings is the belief that tax matters come to an end when a person dies.
In reality, there are often still tax issues to deal with. Executors may need to consider:
the deceased person’s final tax return
income received by the estate during administration
Capital Gains Tax if assets are sold
The responsibility for ensuring that these matters are dealt with correctly normally rests with the executors.
Overlooking estate income
During the administration period, the estate may continue to receive income.
This might include:
bank interest
dividends from investments
rental income from property
In some circumstances this income needs to be reported to HMRC.
Executors sometimes overlook smaller amounts of income, particularly where accounts remain open for a period after death. Keeping accurate records of income received during administration can help avoid problems later.
Missing Capital Gains Tax issues when assets are sold
Another common issue arises when estate assets are sold.
Assets are normally valued at their market value at the date of death. If they are later sold for more than this value, a Capital Gains Tax liability may arise.
This frequently occurs where property increases in value before it is sold.
Executors may also need to consider whether the UK property reporting rules apply, which in some cases require gains to be reported to HMRC within 60 days of completion.
Delays in dealing with HMRC
Executors may also encounter difficulties where communication with HMRC is delayed.
For example:
HMRC may request information about the deceased’s final tax position
estate tax returns may be required
HMRC may raise queries about income received during administration
Responding promptly and keeping good records can help avoid unnecessary delays in administering the estate.
Uncertainty about record keeping
Keeping clear records is an important part of administering an estate.
Executors should keep records of:
valuations of assets at the date of death
income received by the estate
expenses paid during administration
proceeds from asset sales
These records can be essential if HMRC raises questions about the estate’s tax position at a later date.
They also help ensure transparency when dealing with beneficiaries.
Assuming beneficiaries deal with the tax
Another misunderstanding is the belief that beneficiaries are responsible for dealing with all tax issues relating to the estate.
In many cases, tax matters must first be dealt with at the estate level before assets are distributed.
Executors are therefore responsible for ensuring that any tax obligations are addressed before the estate is finalised.
Taking advice early
Many of the issues executors encounter arise simply because the tax rules surrounding estates are unfamiliar.
Seeking advice early in the administration process can often prevent problems from arising later.
Advice may be particularly helpful where:
the estate includes property or investments
assets are likely to be sold
the estate receives significant income
executors are unsure about reporting obligations
Understanding the tax position from the outset can help executors administer the estate with confidence.
Understanding executor responsibilities
Executors play an important role in ensuring that the estate’s tax affairs are handled correctly.
This may involve:
dealing with the deceased person’s final tax position
identifying income received during the administration period
considering Capital Gains Tax when assets are sold
responding to queries from HMRC
How we can help
We regularly assist executors and trustees with the tax aspects of administering estates.
This may include:
reviewing the estate’s tax position
preparing estate tax returns where required
advising on Capital Gains Tax issues
dealing with HMRC correspondence
If you are acting as an executor and would like guidance on the tax issues involved in administering an estate, we would be happy to discuss your situation.
