Hi, I would be grateful for your comments on the following queries:
A deceased had a number of life policies and bonds and death has resulted in chargeable event gains on these policies. The amount is significant and will result in a significant amount of income tax falling due. I understand that this is not declared as income in the administration period but rather in the final tax return of the deceased to the date of death? If this is then income tax that falls due in a the final tax return to the date of death, then can the income tax liability be deducted on the IHT400 when calculating IHT and so reduce the value of the estate chargeable to IHT?
I have also seen mixed comments on accrued interest to date of death and how this should be declared on the IHT400, do some deduct a tax credit of 20% on all income declared as accrued as at the date of death? If so, do you include a breakdown to HMRC to show your calculations to reach the net accrued interest and include this with the IHT400?
I understand that this is not declared as income in the administration period but rather in the final tax return of the deceased to the date of death?
Correct. Assumes the deceased was the beneficial owner of the rights under the policy (no trusts involved).
If this is then income tax that falls due in a the final tax return to the date of death, then can the income tax liability be deducted on the IHT400 when calculating IHT and so reduce the value of the estate chargeable to IHT?
Yes
Interest paid after the death but relating to a period pre death should be apportioned for IHT (and the amount accrued pre death forms part of the estate for IHT). However, this is not the case for income tax purposes as the full amount should be included as estate income. Unfortunately, an element of double taxation may arise.
Gains were the CE is death are taxed on the policyholder, in the way you say.
SLR can help. The resulting IT liability is a debt of the deceased.
Interest accrued at death and paid afterwards is an asset of the estate. The executors pay tax at 20% (but eventually the beneficiaries may pay more or less than that) on the whole of the interest, subject to higher rate relief under s 669 ITTOIA. What you have been told is not how the relief works.