There is a specific gift of a property in a will of the deceased due to a beneficiary which has been rented out before and during the administration period. Income tax has been paid by the estate on the rental income up until 5th April 2021. The property is in the process of being assented to the beneficiary. Is it advisable to wait until the assent has been registered with the land registry before arranging for accrued rent and future rental payments to paid to the beneficiary?
Regarding the income tax already paid on the rent, should this be deducted from the rental payments which have already accrued, before they are paid to the beneficiary, and an R185 provided to the beneficiary of the property, or is this tax to be borne by the estate?
The executors are liable to income tax on the rental income arising during the administration period at a rate of 20%.
On assent to the beneficiary, from that date as beneficial owner the beneficiary is liable on future rental income. The rental income accrued from date of death to date of assent (ie gross less trustees tax paid) is paid over to the beneficiary who is labile thereon albeit with a credit for tax paid by the trustees.
I see no reason to wait for LR registration once an assent has been made.
Malcolm Finney
Apologies for the late follow-up on this topic, but I have a closely related query.
2 sons are beneficiaries, DOD 2017. The leasehold property has not been updated at HMLR and as far as aware, no assent otherwise completed. The property has been let out since 1st July 2021 with income being paid only into one of those son’s bank account.
Strictly speaking as no assent has been completed this is still the estate’s income. However the reality of course differs, with income being paid directly to one of the beneficiaries. In this case would / could one argue that the income tax liability therefore is a personal one of the beneficiaries?
The obligation of the executors deduct tax ends on the earlier of the assent/appropriation of the income producing asset and the ending of the period of administration. See HMRC’s trust, settlement and estate manual for their interpretation of when the admin period ends.
The deceased died in 2017, it would be unusual for the admin period still to be in progress five or more years later…
If the admin period hasn’t ended then the executors were foolish to agree to the rent being paid to a legatee. How would the executors know if the legatee is declaring the rents to HMRC, especially if legally it’s not his/her income - so the legatee can’t be faulted?
HMLR is about legal title. The taxability of the rent is ultimately about who at any given time owns the equitable title (often wrongly called the beneficial ownership, which is a tax concept). An extra complication is that where an executor or trustee receives the rent they may be liable to pay tax at basic rate which is then credited to the equitable owner.
Under s271 ITTOIA 2005 dealing with property income “The person liable for any tax charged under this Chapter is the person receiving or entitled to the profits.” I am not personally aware of any case where an executor or trustee has been pursued by HMRC for failing to receive rental income which they were not “entitled” to but could have received and didn’t. In other areas e.g. deduction of tax at source including PAYE omission to deduct has clear consequences. But under s659 it is the owner of the absolute or limited interest or recipient of a discretionary payment who is liable and not the executor. I suggest that the executor notifies chargeability under s7 TMA and if the beneficiary is co-operative discloses the amount of net rental income and who received it. If the beneficiary is not co-operative and will not divulge the necessary information I would write informally to HMRC and drop them firmly in it. A warning shot across the bows that this is what will happen may concentrate the beneficiary mind wonderfully.
There is a separate technical issue of whether what the beneficiary has done is actionable on the part of the PR but this is academic provided HMRC are content to chase the beneficiary alone (as I think they must). Is there not also an issue about how the beneficiary managed to grant a lease or tenancy of a property to which they had no legal title, making them an executor de son tort (or north of the border, delightfully, a vitious intromitter!). I am not a property law expert but is that grant valid and can any incipient invalidity be cured by a supervening assent?
Jack Harper
It has since occurred to me that a beneficiary is taxable on estate income on a grossed-up basis. I can’t imagine HMRC will be happy to credit and even refund tax assumed to have been deducted if it was not. I would expect them to argue that s659 did not preclude them from also assessing the beneficiary to basic rate under s 271.
Thank you for your replies. To clarify: the Execs and beneficiaries are one and the same, which therefore makes the process easier in some respects and we can advise them to put forward the application to HMRC for income tax on the basis of direct receipt as beneficiaries, rather than PRs