income tax on estate income

Can anyone with a better memory than mine remember how estates used to be taxed to income tax on residuary income and how the change over on 5 April 1995 (when the rules changed to our present rules) worked?

I have an intestacy going back to 1986 with a substantial shares income.

There were no distributions at all before 5.4.95 either to the children, with an absolute interest in part, or to the widow, with a life interest.

Do the new rules apply to all pre 1995 income, so it is all bunched until distributions were made, or does this only apply to the life interest income and not the absolute entitlements?

Simon Northcott

The old rules were in sections 695 and 696 Taxes Act 1988. For life interests under a will, interim payments of income during the administration period were initially taxed as income in the year they were paid, but on
completion of the administration of the estate, all the income of the administration period was treated as having accrued evenly over that period, and the assessments for each year were then revised accordingly. This was a cumbersome process and unsuited to
self assessment.

For absolute interests in residue, interim payments were treated as primarily distributions of the estate income and assessed accordingly on an interim basis. On completion of the administration period the actual income
of the residuary estate for each tax year was then assessed on the beneficiary for the years concerned and interim assessments were revised.There were rules to ensure that no more than the amount of estate income was actually assessed.

For estates where the administration is completed after 6 April 1995, the alteration of interim assessments no longer applies and any final amount of income payable to an income beneficiary is assessed for the year in
which the administration ends. Similarly for absolute interests the balance of income payable on completion of the administration is assessed as income of the year in which the administration ends.

Malcolm Gunn

I remember that the current rules were brought in as part of the change over to self-assessment. Prior to that I recall that the income from an estate would be paid to a beneficiary as part of a distribution or on the winding up of the administration in one year but would have to be reallocated back over the previous years according to when the income actually arose. Executors had to provide R185’s accordingly.

I remember it was not unusual pre self-assessment for an individual to have a number of open assessments for various years. Who remembers the Prior Year Basis?

Nigel Scase
Greene & Greene

As this is an unusual situation, I would suggest that Simon writes to HMRC for the answer.

Patrick Moroney