I was wondering what approaches everyone takes when, at the end of the admin period of an estate when the income has been reported and tax paid to HMRC, there is inevitably further client a/c interest (for example) which accrues before HMRC confirm and accept the position (which usually takes a while) and distributions can be made?
Do people simply state in a final distribution letter to beneficiaries that there has been further interest in the sum of £X credited in the meantime and leave it to them to report if/where necessary? Do people complete an R185 with £0 tax paid, confirming the further interest has been gross?
I would be interested to know other’s approaches to this.
I take the view that the estate is liable to report and pay tax on income up to the date the administration comes to an end. There is no strict definition of when that is but on the basis that once a final tax return with an end date has been submitted or an informal report made, from that point the executors are holding the residue as bare trustees so any income is that of the beneficiaries and they need to be informed that they have received untaxed income.
Yes - I wouldn’t use an R185 Estate as its not estate income at that point. I suppose you could use R185 Trust but I just inform them by letter or email.
The problem here is that to deal with the informal route of reporting gross interest/dividends is that you should only do so when the gross paying account has been closed and the shares have been sold or appropriated to the beneficiaries. Unfortunately because HMRC takes an inordinate time to provide you with their agreement to the tax liability, the money on client account which is not paying interest can be there for some time. Obviously one should only keep sufficient reserve to cover the tax liability but then if you have to spend further time on the matter for some reason, you have nothing to cover your time costs. If you decide to keep a sizable amount then the beneficiaries may reasonably expect you to pay some interest. One way of dealing with this would be to make an extra payment in lieu of interest which takes into account the benefit your firm has received from those monies.Sadly what was intended to speed matters up, the informal route has certainly not achieve that!
Our approach is to send a cheque to HMRC with the National Insurance Number on the back together with our calculations of the income tax, and then to pay the final distributions shortly thereafter, and then ensure you get indemnities from the beneficairies for any shortfall of the tax (if required). Any interest paid thereafter is held on bare trusts for the residuary beneficairies and forms part of their gross untaxed income. HMRC always pay the cheque in, and saves time.
As with Lex, we send a cheque to HMRC. In practice, HMRC rarely query the tax calculated; however, before reporting the tax, we distribute most of the estate and keep only a modest retention. We also take these funds off the interest-paying account so there is no further (minimal) income for the beneficiary/ies to report. If there is ever any post-cessation income, we advise the beneficiaries that this is theirs to report directly.