You do not say what type of income and whether tax has been deducted.
The income has presumably become taxable at basic rate, by deduction or assessment, on the PRs and is “estate income” for Chapter 6 of Part 5 ITTOIA 2005. TSEM7450-7756.
The difficulty arises in allocating that income to the beneficiaries entitled to it under the rules set out in those statutory provisions.
It is necessary to:
(a) classify the interest of each beneficiary and their entitlements to estate income; and
(b) identify payments to them, if any, in the relevant tax period.
An initial problem is not just that an intestacy is not mentioned in the rules but that therefore we are not told how to classify the statutory legacy. Is it like a pecuniary legacy in a Will? That would not carry a right to income (as opposed to interest) so it is not apparently a “specific disposition” which under the rules is taxed on the beneficiary entitled to the income attributable to it.
But what if debts exhaust residue so that estate income is actually paid to a pecuniary legatee? I would expect HMRC to tax him on it. The statutory legacy is like that but is payable in priority to residue, which makes it more likely it will include income where there is no residue, so surely it cannot be taxed on those who in the event receive nothing. TSEM7800-7868 is silent on treatment of income.
I assume that the statutory legacy is an absolute interest and that so are the interests in residue of H A and B. You have to assume that residue is ascertained and identify who would then be entitled to the income. In the first instance it will be residuary income so divisible 50% to H and 25% to each of A and B.
Now one identifies payments. I understand that there will have been none before the variation. Payments will occur later during the rest of the admin period or at its end. Under s.650(4) a payment is made not just to a person direct but to another in right of the person or for their benefit. Thus a bankrupt remains taxable personally on income which vests in his trustee.
The variation has assigned pre-variation income differently to its strict entitlement but when payments are made they should be taxed ultimately in the above proportions. (In an exceptional case on the statutory legatee if there is no residue). Income arising after the variation will be taxable on the persons to whom the document allocates it (it is no longer allocated per the Will).
It is quite common for a variation to not re-allocate income arising before its execution but to delay payment because the income is not taxable on the beneficiaries until paid. But for absolute interests income has to be ultimately allocated to tax years and liabilities adjusted if different to those charged by reference to tax years of payments.
TSEM7400 deals with small estates and informal procedures. In my experience the Chapter 6 rules can be applied with a sensible broad brush as long as no liberties are taken in arriving at the tax outcome of the allocations e.g. payments of income are made to repayment claim beneficiaries in excess of what they are entitled to under the rules.
Jack Harper