If shares in an unquoted private company are sold by the Executors under a POS and capital treatment does not apply such that it is an income distribution, do the Executors pay income tax at the dividend ordinary rate of 7.5% from estate and are the Beneficiaries subject to income tax at dividend tax rates up to 38.1% with a credit for the 7.5% paid by the Executors on the amount they receive from the estate?
Assuming income treatment, the executors are liable at the dividend ordinary rate (ie 7.5%) and the income of the beneficiaries is grossed up and subject to the dividend rates of 7.5%, 32.5% and 38.1% with credit for the 7.5%.
Executors are not entitled to the dividend allowance (£2,000).
Thank you for your comments which are what I thought should be the case but Practical Law Company had made the following comment which I did not follow as I thought the maximum income tax on the executors could only ever be the ordinary dividend rate of 7.5% and the beneficiaries taxed on the grossed up income with the 7.5% credit as you state.
“The usual position appears to be that income arising to the PRs during the period of administration results in the PRs receiving the income as income of the administration period and paying the income tax referable to the income. What is not clear is how this general rule interacts with the share buyback rules.
It is not clear for these purposes whether or not the seller of the shares and the party who is taxed on the receipt is the PR or the underlying beneficiary, for example. If the general principles of how income is taxed during the period of administration apply, then you would expect the sellers to be the PRs and income tax to be payable by the PRs themselves at the relevant rates. It is not clear whether there would be any further income tax to pay once the proceeds are distributed out to the beneficiaries”.
Hence my query to see if anyone had actually come across a share buyback from executors.
I am unable to trace the quoted passage from Practical Law. I don’t agree with it. I agree with Malcolm.
PRs are taxed as recipients of income. Not being liable to higher rates they pay tax on a distribution (including one from an OSP) at 7.5% without dividend allowance. Beneficiaries are then taxed under Chapter 6 of Part 5 of ITTOIA depending on what type of interest they have in the estate at their own rates of tax and the allowance is available to them.
They are taxed on dividend income of the PRs as dividend income. PRs are just a conduit pipe. While forms are not necessarily reflective of the law HMRC go to much trouble to achieve that. Form R 185 (Estate Income) has box 18 for the dividend and the tax paid by the PRS so the beneficiary can make their own itemised return. This links into SA107. The system is complicated by the initial tax charge being on a receipts basis but presumably if the PRs choose they can identify an actual distribution as being of a specific variety of the income they themselves received: the very design of the form implies that the PRs must identify what is being distributed. This will come out in the wash for a beneficial absolute interest but the tax position of limited and discretionary interest beneficiaries is sensitive to what they receive and when.
I must admit to never having actually been involved with executors and a share buy back but, like Jack, struggle to see how the Practical Law comments can be correct.
My only comment is whether (which certainly doesn’t seem to be the case) PL are referring to a purchase of shares which occurs post the administration period at a time when the PRs hold the shares as bare trustees for a beneficiary; in which case the PRs have no tax exposure.
Thank you both for your further comments. The PLC comments were in response to the query raised with PLC which I did not follow either and thought I may be missing something as it is an unfamiliar area.
Whilst on the topic of POS from executors, for the benefit of any searches on the forum in future, can I perhaps confirm the position should the capital treatment apply rather than distribution treatment. My understanding is that the executor will have a CGT base cost of the market value at date of death in which case this is likely to result in a far lower taxable amount than an income distribution (which is calculated with reference to the original subscription price for the shares which typically may be £1 per share). Satisfying the POS conditions for capital treatment is likely to apply and clearance should be sought where the company is a trading company, with the trade benefit test met where the executors/beneficiaries are unwilling shareholders and the executor as I understand takes over the deceased’s period of ownership and only requires 3 years ownership rather than the normal 5 years. Should the executors have a CGT loss then that will expire at the end of the administration period if not used, and cannot be passed on to the beneficiaries. Is there no further tax for the executors or beneficiaries when the proceed from the POS are paid out of the estate to the beneficiaries?
If the PRs effect a sale qua PRs CGT is payable by them at 28% but no further tax is payable on distribution to the beneficiary(ies). Re POS, there is in general no aggregation of ownership periods except as between the deceased and the PRs (only a 3 not 5 year period of ownership needs to be satisfied).
Another possible option is for the PRs to appropriate the shares to beneficiaries for the latter to sell possibly subject to CGT at lower rates and enabling more than one annual exempt amount to apply (PRs lose the annual exempt amount after two tax years following the tax year of death).
The above is correct - Exempt distribution (subject to CGT), company can apply for clearance. Agree with Malcom 3 years if the shares are inherited.
The rules are complex - CTM17500 - Company Taxation Manual - HMRC internal manual - GOV.UK
You need to decide if the sale is subject to dividends or an exempt distribution. The PR’s are required to request the share transfer from the company, s.773 CA 2006, they are required by law to obtain probate/LOA before the execution, which can produce time issues, I mention this as I agree with Malcolm’s suggestion to consider transferring the shares before the sale to the beneficiaries (or at least considering this option).
On the basis you obtain clearance, CGT ought to be minimal. Revalued on the date of death?