The introduction of self-assessment puts more responsibility on solicitors acting as, or advising, executors so that they have to act almost like accountants.
Solicitors are now responsible for ensuring an estate is administered in a tax efficient manner, with tax returns completed on time and payments made in stages for the current year, according to dates laid down by self-assessment rules.
In the past, it was common for solicitors to leave estate tax matters until the estate had been substantially completed. Such practice would now lead to a series of mounting fines for the executor and beneficiaries.
This is the key to success. Early tax planning can save time and money so consider when the income is likely to be received and plan distributions accordingly.
Also consider the financial position of the beneficiaries at the outset. For wealthy beneficiaries looking to minimise their tax liability, it may be best to delay distributions and so postpone the impact of higher rate tax until a more convenient time. For those in the middle range the payments might be spread to avoid hitting the higher rate tax threshold. Needy beneficiaries may want a speedy settlement, but spreading their entitlement over a number of tax years may be more likely to help them utilise allowances and fall beneath tax thresholds.
Also take into account that a large income distribution in one year may affect the beneficiaries' tax payments on account in the next. If in doubt, call in the accountants/tax advisers early to assist with the planning.
The solicitor acting as executor must advise the Inland Revenue of the estate's untaxed income and capital gains. The normal deadlines apply – 30 September if the Revenue is to calculate the tax, 31 January if not. However, the Revenue will not work out the chargeable gains for you. The beneficiaries must also be advised of the income included in their distributions to enable them to include these figures on their personal tax forms. It is the executor's responsibility to ensure beneficiaries can meet their deadlines.
Important dates for the tax year 6 April 1996-5 April 1996
31 January 1997 – first payment, on account;
31 July 1997 – second payment;
30 September 1997 – submit return if the Inland Revenue is to calculate tax liability;
5 October 1997 – taxpayers must inform the Revenue of sources of income to ensure they get correct forms;
31 January 1998 – payment of balance of any outstanding tax for 1996-97 with all capital gains tax for 1996-97;
31 January 1998 – latest date to file 1996-97 return;
31 January 1999 – latest date by which the Revenue can announce an enquiry.
Automatic penalties for late returns start at £100 and interest and surcharges are imposed for payments received after the dates listed above.
Tax liabilities are passed down to executors
When someone dies, their tax liabilities become the responsibility of the personal representatives, who must try to keep to the dates above. This may be difficult if the deceased's tax affairs were in arrears, or if there is a delay in obtaining letters of administration.
Problems could occur simply by a death occurring, for example, in December. This is because the tax return for the previous year, with up to three tax payments, must be paid by the following 31 January. These payments would be for: any outstanding income tax for the previous financial year; capital gains tax for the previous year; and the first tax payment for the current year. As yet, there appears to be no legislation giving the executor more time to assess the tax situation, to wait until probate is granted, or indeed for the penalties to be mitigated.
If a delay is unavoidable, it would be advisable to write to the Revenue at the earliest opportunity, before the relevant deadline has passed, to explain the situation, give an indication of when matters could be dealt with and request no penalties.
Delays may be considerable where a will is contested and it may not be clear which beneficiary gets which assets if applications are made under the Inheritance (Provision for Family Dependants) Act 1975.
Early clearance of income and capital gains tax
It has been announced that procedures will be introduced to help the speedy completion of trusts and estates. These will include the early issue of tax returns and early written confirmation that the Revenue does not propose to investigate the return. This will help both executors and trustees who would otherwise have to wait for a year to know if they are in the clear. But there may still be delays this year as the trust tax return forms are not yet ready.
It is likely that further legislation will be passed or concessions granted to simplify some of these matters and give guidance. Until that time, early planning is the best approach – forewarned is forearmed.