Accrued income up to date of death

Hello

A useful question for all possibly, as I could not find any reference to this online/in manuals/legislation.

This question relates to the declaration of accrued income up to date of death, which we include in the IHT account for a deceased estate. As we all know, interest/dividends are now paid gross.

The STEP Diploma (E&W) Taxation Guide for the 2019 sitting states at page 18 “it is the sum net of 20% tax (the rate of tax payable by the executors) that is included for IHT purposes”.

So does this mean that in a taxable estate, we should be looking to deduct 20% income tax on income (such as bank interest) up to date of death, to prevent a “double taxation” of the income being charged 20% income tax and then 40% inheritance tax?

The gross income is then shown on the income schedule where the normal 20% income tax is deducted.

If the answer to the above is “yes”, then should we be doing the same for XD dividends at the rate of 7.5%?

Please note the above question is not in relation to the s.669 ITTOIA 2005 relief which is available to higher/additional rate tax payers.

Thanks
Kind regards

Yes I believe that is the correct procedure to avoid double taxation. Unfortunately in the case of dividends I don’t think you’ll find anything in the revenues guidance but maybe someone else knows where it’s hidden

Patrick Moroney

Income accrued but unpaid as at the date of death is subject to tax in the hands of the personal representative.

On that basis, it would seem appropriate to continue to show the accrued income as a “net” receipt after the deduction of any tax that would normally need to be paid by the PRs.

I would be inclined to view XD dividends in the same light – which logic would seem to dictate - although HMRC might quibble.

If, at the end of the day, the income received in the estate is such that HMRC does not require a return of estate income, so that the PRs might not actually pay the tax, that is a consequence of the HMRC concession which could not reasonably have been foreseen at the time of the grant application.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Don’t forget the ‘dreaded’ income tax accrued income scheme rules, which in my experience hardly anybody appreciates/understands on interest from government bonds etc

Thanks all for your comments - has anyone come across anything in the HMRC Manuals on this point that they could refer me too (as I haven’t)? I am wondering on the authority to back up our analysis…

I’m afraid there is nothing in my knowledge from HMRC on the current position, but it certainly was Covered in their guidance many years ago. In fact I raise this question as below on the forum in Oct 2017 but no one replied!

Patrick Moroney
patrick

Oct '17

Before the banks started to deduct tax from gross interest several years ago now, the procedure as I recall was that the gross interest accrued to the date of death was netted down and added to the balance of the account for IHT purposes. This was to avoid taxing the same amount twice since on receipt of the accrued interest together with interest to the date of closure, such amount would be included in the personal representative’s tax return for the administration period. This became unnecessary when interest was paid net of tax. Now that banks have recommenced paying gross interest, presumably the old procedure should be followed. However, what if the personal representatives do not receive sufficient interest so as to take the tax liability over £100, which HMRC’s transitional measure refers to, are they required to submit a corrective account to show the gross accrued interest instead of the net sum? If they have to do this when relatively small amounts are involved it really does not make sense. One further point, in the case of interest on an ISA, the gross amount accrued to the date of death should of course be included in the IHT account but on closure of that account, if the bank has not already closed the account as at the date of death and opened and non ISA account (some banks no longer do this) one needs to be careful not to include the accrued interest in the personal representatives tax return or in arriving at the amount of gross interest to see whether the transitional measure applies.

I would be interested in any comments, particularly if I have totally misunderstood the procedure.

Patrick Moroney
BWL solicitors

Hi Melanie

A minor point regarding the divided tax rate - as of 6 April 2022 this is now 8.75%.

Kind regards

1 Like

Not sure I can agree with the above posts.

For income tax purposes Income due before death is that of the deceased whilst income due after death is that of the estate. Wrt to interest income such income is chargeable to income when due and payable. Wrt dividend income it is chargeable when due and payable (in turn depends upon if dividend is a final or interim).

For IHT, income accruing prior to death is included as part of the deceased’s estate. It thus becomes necessary to apportion any income which is paid after death but part of which relates to any period prior to death.

Double tax may arise (a form of restricted relief is available in part under ITTOIA 2005 s669).

The amount of interest included in the deceased’s estate for IHT is the relevant portion of the gross interest with no deduction for any income tax charge. Similarly, dividends quoted ex-div are similarly included.

Malcolm Finney

For the reasons stated in my posting in October 2017 which is above, I cannot agree with you that the gross interest accrued to the date of death should be included for IHT. Certainly my recollection of the guidance which HMRC published many years ago, stated that when gross interest was paid, which was of course before the Banks started deducting tax, such accrued interest needed to be netted down after deduction of tax and added to the balance at the date of death. As I said in my posting, a problem may arise now that personal representatives don’t have to pay tax on that interest if the amount of tax does not exceed £100. The same principle would apply to dividends now that these are taxable in the hands of the personal representatives who in any case would then have to submit the income figures during the administration and pay tax Irrespective of the size of the dividend and of course gross interest which might have been covered by the special allowance would be taxable, no matter how small it was, in those circumstances.

Patrick Moroney

On the basis that interest, for example, is paid after death but in part accrued pre-death means the pre-death proportion forms part of the deceased’s estate for IHT. However, no income tax charge arises on this pre-death proportion and thus there are no grounds to deduct income tax at 20% in calculating the deceased’s IHT estate.

It is the PRs who will be exposed to the 20% income tax charge as the interest (all of it)will form part of the administration period’s income.

Malcolm Finney

So Malcolm, Isn’t the accrued interest being taxed twice, First at 40% and then at 20%?

Patrick Moroney

But Patrick they are different taxes. Many are paying 40% IHT on assets acquired with income taxed at 45%

Jack Harper

I agree Jack but going back as far as estate duty, I can clearly recall that interest accrued to the date of death was always netted for tax purposes and indeed when I was writing programmed learning courses for my former employers,( now I’m showing my age!) that was included in the flowchart we produced. Perhaps it was wrong but I can also recall mention of it in HMRC guidance.

Patrick Moroney

Yes, if I’m correct.

The only relief from this double tax is under ITTOIA 2005 s669 but this is limited and only applies to an absolutely entitled residuary beneficiary and then only if such beneficiary is subject to income tax at the higher rate. The relief operates by reducing the income arising from residue by the amount of IHT payable in respect of that income.

Malcolm Finney

1 Like

I’m pretty sure that it was always the net interest accrued figure that was added to the account balance to provide the valuation of an account for IHT purposes prior to the date when banks etc no longer had to deduct the income tax at source. I note the Income tax relief for higher rate tax payers pointed out by Malcolm Finney and presume the rationale behind the relief was that it would be unfair to further subject the interest to extra tax once it had been taxed at basic rate and at 40% IHT.

Graeme Lindop
Probate Consultant
Coles Miller Solicitors LLP

imagee4112d.PNG

imageec8bc4.PNG

IHT 400 Notes pp67 and 68 makes comments about dividends and interest due being valued net and in the latter case net means after deduction of tax at basic rate

Thank you Jack. It’s a relief to know that I have not been getting it wrong for the many years I have been doing it !

Patrick Moroney

I am unaware of the authority upon which HMRC base their view that interest paid post death and then pro-rated to a period pre death should be included net of income tax in the death estate for IHT.

It cannot be argued that if, say, 100 gross interest is paid post death with say 80 pro-rated pre death that a 20% income tax charge is deductible from the 80 because no income tax charge arises on the pro-rated interest for income tax purposes (ie their is no liability of 20% of 80 deductible in calculating the death estate) [CIR v Henderson’s Executors [1931]; Halpin v HMRC [2011]; Dunmore v McGowan [1978]].

The issue of double taxation in this area is well known ie the levying of income tax and IHT on the same income. If, in calculating IHT, a 20% income tax charge is allowed as a deduction from the pro-rated interest then IHT would not be levied thereon and no issue of double tax would arise; making, presumably, ITTOIA 2005 s699 superfluous.

I am aware of the IHT Notes to the IHT 400 to which Jack refers but have never viewed such Notes as indicating any authority supporting HMRC’s stance.

I appear to be a loan voice. I would welcome any guidance as to where I’m going wrong.

Malcolm Finney

As regard the gross income it seems to me that it must be contractually due and, although payable at a later date, must relate in part to a pre-death period and accrue on a day to day basis. If it does not relate to such a period or is not payable unless and until the later date occurs (a bullet payment of interest) tax on any accrual is surely not justifiable. If HMRC allow tax at basic rate to be deducted it would seem that it is based on a concession to which no one is likely to object but surely cannot be forthcoming when the interest is of a type that is payable gross. The precise nature of the interest must depend on the actual drafting and this must be true also of rent for land or chattels. This might be payable in advance, and so taxable in full on death of the lessor, even if unpaid, unless that was an event which caused a refund under the drafting (which would surely be unusual). But I do not see it as an argument that IHT should not apply just because it is liable to an assessed tax in the recipient’s hands.

Jack Harper

HMRC have always accepted a deduction of basic rate tax on gross income apportioned to death to avoid double taxation. There is likewise the relief for higher rate beneficiaries Malcolm has mentioned which applies also to ex dividend I seem to remember.

Simon Northcott