What is the general consensus regarding the taxation of client account interest earned on estate funds during the administration period?
A former colleague and I were taught to credit the interest at the end of the matter, account to HMRC for basic rate tax (20%), and include it with the estate’s other income for the administration period.
However, two other colleagues were taught to credit the interest at the end of the matter, advise the beneficiary that it has been paid gross, and leave it to them to account to HMRC for any tax due.
Is there a definitive right or wrong approach to this?
I have always understood the first approach to be the correct one. Interest earned on estate monies held in a solicitor’s client account during the administration period is income of the estate, not income arising directly to the beneficiaries. It should therefore be included as estate income and dealt with by the personal representatives as part of the estate’s income tax affairs.
I would be cautious about simply paying the interest gross to the beneficiaries and leaving them to account for any tax. During the administration period, the funds remain vested in the personal representatives and the income arises to them in that capacity. The beneficiaries only become entitled to estate income when it is distributed in accordance with the normal administration period rules.
One point worth mentioning is that the reference to accounting to HMRC for “basic rate tax (20%)” reflects the pre-April 2016 regime, when banks generally deducted tax from interest at source. Since April 2016, interest is normally paid gross. The estate therefore receives the full amount of the interest, and the personal representatives account to HMRC for any income tax actually due as part of the estate’s tax affairs, rather than by automatically deducting and remitting 20%.
Unless I’ve overlooked something, I don’t believe the fact that the money is held in a solicitor’s client account changes the nature of the income. It remains income of the estate during the administration period. If anyone takes a different view, I’d be interested to know whether there is any authority or HMRC guidance that supports treating client account interest as arising directly to the beneficiaries.
We will account to HMRC for any income tax applicable to interest earned on the client account during the estate admin period, along with any other income sources etc.
We usually retain a small sum on account ahead of clearance, especially if we are Executors, and then we provide the final balance, including any interest, to the beneficiaries. We tell them about the additional interest and that it has been paid to them gross and they should declare it.