Estate income during administration:
When someone dies, their estate does not immediately pass to the beneficiaries. Instead, there is usually a period of administration while the executors gather the assets, settle liabilities and distribute the estate.
During this time the estate may continue to receive income. This is known as income during the administration period, and in some circumstances it may need to be reported to HMRC.
Many executors are unsure whether this income needs to be declared or whether tax returns are required. The answer will depend on the nature and amount of income involved.
What is the administration period?
The administration period is the time between the date of death and the point when the estate has been fully administered.
During this period executors are responsible for managing the assets of the estate. This may include:
closing bank accounts
selling property or investments
settling debts and liabilities
distributing assets to beneficiaries
While the estate is being administered, the assets may continue to generate income.
Types of income an estate may receive
Common examples of estate income include:
interest from bank or building society accounts
dividends from shares or investment funds
rental income from property
income from other investments
This income does not belong to the deceased person. Instead, it is treated as income of the estate itself during the administration period.
Executors are responsible for ensuring that any tax reporting obligations are met.
When does the estate need to report income to HMRC?
Not all estates need to file tax returns.
In many straightforward cases, HMRC allows executors to deal with estate income through an informal reporting process, provided certain thresholds are not exceeded.
For example, where income is relatively small and tax has largely been deducted at source, HMRC may not require a formal tax return.
However, if the income exceeds certain limits, executors may need to submit estate tax returns under the Self Assessment system.
When estate tax returns may be required
HMRC may require a formal tax return where the estate receives more significant levels of income.
Situations where this may arise include:
substantial interest or dividend income
rental income from property
estates with multiple investment portfolios
estates administered over several years
In these circumstances HMRC may issue a Self Assessment return for the estate covering the administration period.
Executors will need to ensure that the income received by the estate is reported correctly.
Income distributions to beneficiaries
Executors may also distribute income to beneficiaries during the administration period.
When this happens, beneficiaries may need information about the income they have received so that they can report it on their own tax returns if required.
Executors therefore need to keep accurate records of:
income received by the estate
tax deducted from that income
income distributed to beneficiaries
Clear records make it easier to deal with both HMRC and beneficiaries.
Estates that include rental property
Estates that include property often require particular attention.
If a property continues to be rented during the administration period, the rental income forms part of the estate’s income and may need to be reported.
In addition, if the property is eventually sold, executors may need to consider Capital Gains Tax depending on how the value of the property has changed since the date of death.
Property can therefore give rise to both income tax and CGT considerations during the administration period.
How long does estate income reporting continue?
Estate income reporting continues for as long as the estate remains under administration.
For simple estates this may be less than a year. More complex estates, particularly those involving property or investments, may take longer to administer.
Executors remain responsible for ensuring that any tax obligations are met throughout this period.
Common misunderstandings
Many executors assume that estate income does not need to be reported.
Some common misunderstandings include:
assuming that income received after death is ignored for tax purposes
overlooking interest or dividend income received by the estate
assuming beneficiaries deal with the tax instead of the estate
In reality, the responsibility for reporting estate income generally rests with the executors during the administration period.
Understanding how these rules work can help avoid problems later.
Executor responsibilities
Executors are responsible for ensuring that the estate’s tax affairs are dealt with properly.
This may include:
identifying income received by the estate
determining whether HMRC requires a tax return
keeping records of income and tax deducted
dealing with HMRC correspondence where necessary
When professional advice may help
Many executors are dealing with estate administration for the first time, and the tax rules surrounding estates can sometimes feel unfamiliar.
Professional advice may be helpful where:
the estate includes property or significant investments
income arises over several years
executors are unsure whether a tax return is required
HMRC has requested further information
Obtaining advice can help ensure that the estate’s tax affairs are handled correctly and that executors fulfil their responsibilities.
How we can help
We regularly assist executors and trustees with the tax aspects of administering estates.
This may include:
reviewing whether estate tax returns are required
preparing estate tax returns where necessary
advising on tax issues during the administration period
dealing with HMRC correspondence
If you are acting as an executor and would like guidance on the tax position of an estate, we would be happy to discuss your situation.
