How are practitioners dealing with post-death gross interest on their designated accounts following April’s changes?
Previously, it was easy to know when all of the gross interest had been received and a letter to HMRC advising them and enclosing a cheque for the tax due sufficed. However, as gross interest will continue to be received until the designated account is closed i.e. the final distributions are made and you cannot make the final distributions until you know the tax liability, it seems to be a bit of a chicken and egg situation. How are others dealing with this?
I have been reliably informed by an accountant that we only need to disclose gross interest which exceeds £500 in any one tax year, i.e. where the tax liability exceeds £100. However, I have heard that a Tax Return is required for all gross dividends received, irrespective of value. Is this right?
By designated accounts presumably you mean trustee accounts?
Yes your last query is correct. Trusts do not have the benefit of the 0% dividend band so now have to account for tax (by way of a tax return) on all dividend income. It is therefore suggested that, wherever possible, trusts in receipt of dividend income should mandate such income directly to the beneficiary. We have had problems with some (well known) investment houses and fund managers not quite ‘getting’ this concept and continuing to route the dividend income through a central trustee account rather than directly to the individual beneficiaries!
If you are doing the trust tax return then, again, yes interest in excess of GBP500 needs to be disclosed to HMRC. Trusts that only receive interest income and whose tax liability is GBP100 or less do not need to submit a tax return, if they previously did not do so. Although those that are already within self-assessment and find themselves in these circumstances should contact HMRC trusts and ask to be taken out of self-assessment (or that no further tax return delivery notices be issued).
I think the advice received in connection with the GBP500 limit is misleading though and you should advise all clients (for whom you hold money that earns interest) of the total amount earned during a tax year, irrespective of the amount, as (unless you prepare their personal or trust tax return) you will not know what other interest they have received and whether or not, or to what extent it is taxable?
Thank you for your message. I meant deposit account.
I am talking in terms of us holding money belonging to the estate, rather than a “trust” situation. Hence, it is is not appropriate for dividends to be paid direct to the beneficiaries.
HMRC do not require gross interest to be declared where it is the only source of income and the liability is below £100 (see their April Newsletter) but, as you state, this does not apply to dividends, which have to be returned. In most cases this can be made by letter (see the Dec 2015 newsletter - there are some other conditions).
The £100 exemption should at least save you having to make returns of ever decreasing interest on your client account at the end of the administration.
One would not normally agree the liability with HMRC under the informal basis until the residue has been ascertained. At this point, the administration of the estate is complete, although money might still be held in the PR’s account. From that time, the PRs hold any remaining monies as bare trustees for the residuary beneficiaries. Thus any interest arising subsequently is a matter for their tax returns, not the PR’s.