Hi, I’d be grateful for some guidance in the following situation. The estate income is over the £500 tax free amount but meets the requirements for informal income tax reporting (under £2.5m, tax under £10k, no disposals) so that no report is required until the end of the admin period. An interim distribution has been made to a trust. What should be put on the R185 to the trust? The income tax has not yet been paid, but will be paid in the future through the informal reporting at the end of the admin period. If we put it as gross income on the R185, how is this later dealt with on the tax returns for the estate and the trust (as the tax still needs to be paid in estate’s hands so would potentially be paid twice). Should a R185 be issued now showing the gross income and the trust pays tax on this basis, then after the estate admin is completed, issue a further R185 and the trust then files an amendment (which seems a lot of hassle)? The trust tax return would be due before the estate administration is complete and the informal return completed. I understand that the R185 should only show tax that has actually been paid not that will be paid. Alternatively, even though the estate qualifies for the informal procedure could the estate still register and complete a formal tax return, so that a correct R185 can be issued? or is this prohibited as it meets the informal reporting requirements. Many thanks for any assistance. Any links to sources would be appreciated.
I am of the view that if you know that the income will suffer income tax (albeit not payable until the end of the admin period), then you should include that on the R185. This is certainly how we deal with estates in informal procedures where interim distributions have been made.
When preparing R185s for estates in self-assessment, you would still include the tax payable the following january even if this was not actually paid at the point of preparing the R185.
Neil.
You don’t say but I have to assume that the Trust is a residuary beneficiary of the Estate? You will need to record the arising income in the Estate for each tax year and if any payment in satisfaction of entitlement under the Will has been made to a residuary beneficiary, then it is deemed to include their share of that income - see TSEM7678; other benefs shares will be carried forward until whichever tax year a payment is made to them or, if none, the final tax year when everything is concluded.
If payments in satisfaction of residue are made in any subsequent years, then the process is repeated.
As long the complex limits aren’t breached, this won’t affect the “informal” status for the Estate, so the PR’s won’t need to submit an Estate tax return and can simply write to HMRC at conclusion and pay the tax. All beneficiaries will get credit for the tax paid by the PR’s, as shown on their own R185s. They may have R185s for more than one tax year, depending on when payments were made to them.
As far as the Trust is concerned, they are treated as having received that income in that particular tax year so will include it in the Trust Tax Return, with credit for the tax paid by the PRs. Only if they are liable at higher trust rates, will there be an additional tax liability.
Thanks Lesley, yes that is correct. The issue though is that at the time the interim distribution is made (2024/25 tax year) and the R185 needs to be issued, so that the trust can complete it’s tax return, no tax has yet been paid by the estate (as the Estate tax return is not due until the end of the admin period which is still ongoing). However this will be paid by the estate in the future. If the R185 shows gross income then this will need to be amended later. I was under the impression that the R185 could not show a tax deduction as the tax has not yet been actually paid, but can see that others (thanks Neil) take a different approach and include the tax deduction even though this will not be paid until a future date.
Many thanks Neil, this seems a logical approach, do you have any guidance you can direct me to re including tax that has not actually been paid yet on a R185? It would be much appreciated.
i would do the same as Neil has suggested. You know the tax will be paid and so complete R185 as if the tax has been paid by the estate. Otherwise you have to start amending tax returns/disclosures to HMRC.
I complete the R185 as ‘normal’.