In an estate where the deceased’s shares are specifically bequeathed, I appreciate that any subseqent post-death dividends belong to the legatee.
My question is, does the legatee receive the gross dividend, or do they receive it net, with the amount of tax having been deducted from it?
Many thanks.
Martyn Dixon
Harold Bell Infields & Co
Is it now the case that the estate now benefits from a personal allowance for dividends?
PA is only available to an individual: s35 ITA 2007. Trustees and PRs do have a CGT annual exemption
Jack Harper
Thank you. That is consistanbt with my understanding. However, surely the dividend are received in the hands of the PRs, even though they are due to the legatee. Should the PRs not include them in the Tax Returns for the Administration Period? Presumably, therefore, the legatee would receive them net of tax?
Thanks again.
Martyn Dixon
My understanding is that until the shares are passed to the legatee the dividends are received by and are taxable on the executors and they then need to provide the legatee with an R185EI with the net income. Legatee can then set their dividend allowance against that income and claim a refund.
The specific legatee or (per Old Testament) devisee is absolutely entitled to the income from the gift subject to:
(a) the right of the PR to take it to pay debts, including tax which is a testamentary expense, in a solvent estate
The order is set out in AEA s34(3) and Sch 1.
https://www.legislation.gov.uk/ukpga/Geo5/15-16/23/schedule/FIRST
A specific gift is way down at category 6. The doctrine of marshalling allows a legatee to recoup any loss from anyone in an earlier category but they cannot recoup downwards to the specific gift. This is per Snell citing Re Wilson [1967] Ch 53. Snell is silent on income from the gift but “property” in the AEA presumably includes any income from it. Also, presumably, even if it is paid direct or “mandated”. These omissions from Snell must indicate no relevant case law (despite being described by my Director of Studies the late John Tiley as “a real book”, for so it is).
Category 8 allows a Will to establish an overriding different order. I have never seen one that did, not even in my worst nightmares about Wills and the SRA, from both of which monsters I am now liberated.
(b) the PRs can be assessed at basic rate on income they receive but are not entitled to (ITTOIA 2005 in each source of income provision).
HMRC TSEM goes on at length about IIP income, mandated or not, but a specific gift is not an IIP as not settled at all. See TSEM3761.
Specific gifts and income from them is dealt with cursorily and thus not helpfully at 7490 citing Hawley.
In my view PRs act as a nominee receiving income belonging to another, who must file his own returns and claim credit for any tax on it paid by the PR. It should not go in the PR’s return. It is not estate income for tax, even though within (a) above. Category 7 is not even an asset of the estate. How this works with online SA returns heaven knows. Probably goes in the white space equivalent. Phone HMRC if one has a couple of hours to spare and a client who is impervious to costs! Not MTD then.
An interesting previous discussion of mandated IIP income is at
https://trustsdiscussionforum.co.uk/t/when-is-income-mandated/3854
That sounds right to me Nigel but I am intrigued how it flows through the online return procedure. The problem with such, compared with paper forms, is that online only procedures do not allow you to test drive them first. I recently came across a clever device on an insurer’s website which comprised a series of screen shots taking you through the TRS procedure on a step by step basis. https://p3.aprimocdn.net/canadalifeuk/registering-a-trust-on-the-trust-registration-service-trs.pdf Why don’t HMRC emulate this to prevent them being so opaque?
Jack Harper
Strictly, the dividends should be included in the estate tax returns and the beneficiary provided with the appropriate R185 showing the tax credits carried by those dividends.
However, in the past HMRC has agreed that where dividends and interest have been paid direct to the beneficiary, only the beneficiary need include them on their tax returns.
In the present instance, perhaps explain the situation to HMRC – that the dividends have not been received by the executor but credited to the portfolio account held with an investment manager which has been transferred directly to the beneficiary – seeking agreement from HMRC that the executors may omit them from the estate return and that HMRC will look to the beneficiary to include them on their own return.
Mindful of pressures on HMRC, though, it may perhaps be less burdensome, and quicker, for the executors to obtain details of the dividends, etc., and include them on the estate return. It will only be if interest or foreign dividends are received which have not already been taxed at the UK basic rate that the executors will be liable for additional tax on the portfolio income. The beneficiary will be liable to reimburse the estate with any such additional tax due.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
R185E is self-evidently designed to deal with “estate income” i.e. income attributable to interests in residue: ss 649 ITTOIA 2005. Income from a specific gift is not an interest in residue.
R185 deals with with trust income (clue in title). Income from a specific gift is not trust income as the as the gifted asset is not held in trust during the admin period and when it ends, unless previously appropriated, is held on a bare constructive trust which is self-evidently not what is meant yb non-discretionary income. It means IIP income.
So neither form is the right one. Because it is not a battle of the forms: the forms reflect the law.
Jack Harper
Noted, Jack.
So on what form should the executor notify the beneficiary of a specific legacy (or devise) of any income received and tax paid/tax credits?
So far as I am aware, many use R185 notwithstanding the limitation you have identified.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals