Accrued income up to date of death


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.

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

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

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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