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