The deceased owned a property which he rented out. He left a Will leaving his residuary estate to his wife. The rental property formed part of the residuary estate. The rental property has now been Assented to his wife. The query is with regards to the income tax liability on the rental income from the date of death up to the date when the rental property was transferred to the surviving wife.
Is the rental income received from the date of death up to when the rental property was transferred to the wife deemed to be the wife’s personal income and therefore to be declared on her personal tax return or does the executor need to include the rental income as part of the estate income?
Where income is derived from a specific legacy, then it is payable to the beneficiary, when the asset is assented.
Where the income arises on the residuary estate, it should be reported by the Estate until such time as the residue is assented.
Income tax on income arising during the administration period is the liability of the PRs (20% re rental income).
Where a residuary beneficiary has an absolute interest (ie entitlement to capital and income) in residue any payments of the rent to such beneficiary by the PRs are subject to income tax on the part of the recipient beneficiary for the tax year of payment (with an offsetting credit for income tax paid on such payments by the PRs). Any rents not paid over to the beneficiary by the end of the administration period are deemed to have been paid to the beneficiary immediately before the end of this period.
On assent of the property to the beneficiary any income arising thereafter is the liability of the recipient beneficiary not the PRs.
So if I understand the position set out in the scenario given (the residuary beneficiary does have an absolute interest and has received the rent following the death of the Testator up to when the property was Assented to her) the PRs must pay the tax on the rental income up to the date when the property was Assented. If the residuary beneficiary is a higher rate tax payer then they pay any additional income tax due.
Further to Malcolm’s response, since 6 April 2017 “those with income from a property business (landlords) will be able to use the cash basis rather than generally accepted accounting practice (GAAP) to calculate their taxable profits”
In this instance the rental income was never paid into the executors bank account. Following the death of the Testator the rent was paid direct from the Tenant to the surviving spouse who is the sole residuary beneficiary. Does the executor still need to report the rental income and the estate pay the tax on it as if the rent was received by the executor?
I suggest the executor inform HMRC that the rent was paid direct to the beneficiary and ask that HMRC assess the beneficiary direct (relieving the estate from liability to tax on that income).
I have found HMRC generally to be amenable to such an arrangement.
ITTOIA 2005 s.271 provides that property income is charged on the person who receives the income OR who is entitled to it. Normally, HMRC would where possible assess the person entitled (not the person who receives the income).
During the administration period it is the PRs who are entitled.
I would suggest that it is the PRs who should report the income and pay income tax thereon.
However, in the light of the fact that all income went directly to the residuary beneficiary it might be easiest if HMRC assessed the beneficiary, not the PRs given in particular that the beneficiary has the income out of which to pay the tax. If so, as Paul suggests, it would be sensible for the PRs to approach HMRC to confirm they would be happy with this approach.