Tax treatment of additional assets that come to light in an estate

Trusts Discussion
1

Where an additional asset comes to light after the completion of the administration of an estate, what are members thoughts on the taxation of such addtional assets?

I have set out my thoughts below but would welcome any comments as we currently have two estates where the deaths occurred in 2011 and 2012 and investment ISA’s have come to light where the tax free status ceased on death (death prior to 6/4/2018), with significant gains and income arising since death. I think a discussion on this topic would assist generally in these scenarios which seem to crop up now and again.

For IHT purposes, the value of a chargeable additional asset as at the date of death would be included as an asset of the estate and any IHT liability arising plus interest would need to be paid.

For CGT purposes, the LPR’s have the equivalent of an individual’s annual CGT allowance for the tax year in which death occurred and only the following two tax years. The gains made on the two Investment ISA’s we are now dealing with are therefore subject to capital gains tax unless appropriated to the beneficiaries prior to sale to take advantage of their own personal CGT allowances. Obviously, the administration of both estates has already been completed, the residuary estates ascertained and the administration period tax position has been settled with HMRC on a formal or informal basis. As such, is an appropriation to the beneficiaries actually required in these circumstances as it could perhaps be argued that unless the sale proceeds are required by the LPR’s to pay IHT or other taxes, the additional asset is effectively held on bare trust for the beneficiaries. If so, at what point is the asset considered to be held as bare trustee by the LPR’s - at the date residue was acertained or the date the asset came to light or some other date?

For income tax purposes, the administration period tax position has already been settled but how should any income arising since death on such additional assets be treated? If the investments are appropriated to the beneficiaries the income will be taxable in the estate from the date of death up until the date of appropriation and any income received afterwards would be treated as the beneficiaries.income. If the investments are considered to be held as bare trustee, the income would be treated in the same way but will depend on what date is used as the date on which the investment is considered to be held as bare trustee by the LPR’s as I mentioned in the previous paragraph.

A M Forster
Hibberts LLP

2

The administration period is a concept of great elasticity. If an asset is discovered many years after the death it recommences as to that asset. If the estate has been long administered otherwise and those entitled to it are all ascertained and of full age it may be that its revived duration is but scintilla temporis.

The period comes to an end when the assets and liabilities have been fully identified but need not continue just because all those assets have not been collected and liabilities discharged. If the PRs can safely assent to/transfer an asset before the universal definitive event occurs the period then ends vis a vis that asset, though as the transferee is a volunteer there might be a contingent recall position until plene administravit or an accounting if the asset has gone to a bona fide purchaser without notice. Usual time limits govern actions by beneficiaries against PRs or the estate if distribution was not spot on.

If no further liability has also arisen in the questioner’s case the asset may be treated as held on a bare trust whatever the strict legal niceties. Tax is a different matter.

1 IHT
The value of the asset is taxable but surely without penalty as reasonable excuse IHTM40142 and 36021(I would expect this to be so even if no formal clearance). s240 IHTA will apply a 4 year time limit for recovery of tax, running from the date it was last paid. Interest would seem to be exigible but HMRC have power to remit it (Oh yes they do!). But the DOV time limit of 2 years after death is not extendible.

2 CGT

Prs can appropriate the asset so s62(4) applies or sell it. How could they justify the latter here? No DOV if 2 years have passed after death.

3 Income Tax

Taxable income after death must be accounted for and taxed as if had been known about all along save that the 4 year assessment time limit will kick in to exclude the year the income arises for both PRs and any absolute residuary beneficiary. It is arguable that the actual payment of the income by the PRs creates a new source, particularly for a limited residuary beneficiary, and above all for a discretionary beneficiary, but HMRC might decline to advance this point if the PR’s own receipt was out of time to assess. They could not give credit to the beneficiary for tax not actually paid by the PRs (a hanging offence) and they might not wish to pursue an outcome that imposed tax without it on the recipient.

Jack Harper