Income Tax Reporting Requirements for Estates

When someone passes away, their Personal Representatives (whether that be their Executors under the terms of their Will or the Administrators where there is no Will) become responsible for taking control of their assets, settling the taxes and expenses of the estate and distributing the remaining assets in accordance with their Will, or the Intestacy Rules if the deceased did not leave a Will. For more information on Intestacy Rules and common misconceptions, see our recent article.

With the changes that were announced in respect of Inheritance Tax in the Autumn budget (see more information on this here), hardly any attention is being paid to the income tax reporting requirements for estates. However, the rise of the rate of inflation to 3% in January 2025 and the Bank of England having set interest rates at 4.25% currently (compared to 0.25% in January 2022) means that estate monies are earning far more income by way of interest than they were three years ago, meaning that more estates will be required to complete income tax reporting to HMRC.

So, when does an estate need to submit income tax reporting?

For deaths that occurred before 5 April 2024, estates that only received income by way of bank interest of less than £500 in total during the administration period did not need to complete any income tax reporting.

From 6 April 2024, estates do not need to complete any income tax reporting where, for every tax year in which the estate administration is ongoing, the estate’s income does not exceed £500 in total across all its sources of income.

As soon as an estate’s income exceeds the above thresholds, the Personal Representatives will be required to report the income tax due to HMRC using their informal reporting procedure, which involves simply writing a letter to HMRC to confirm the income received and the tax due.

Estates do not benefit from any allowances, such as the Personal Savings Allowance, and pay tax on the income it earns at the basic rates, so any bank interest and rental income received by the estate during the administration will be currently taxed at 20% and any dividend income will be taxed at 8.75%. Income earned from ISAs however still retain their tax-free status after until either the estate administration has concluded or three years have passed since the date of death.

Furthermore, estates can only use the informal income tax reporting procedure where all of the following apply:

• The estate was valued at less than £2.5m as at the date of death
• The total of the estate’s income tax and Capital Gains Tax liabilities is less than £10,000
• No more than £500,000 worth of estate assets were sold within any single tax year during the administration period

As soon as an estate exceeds one of the above criteria, the Personal Representatives will be required to submit formal income tax returns for each tax year during the estate administration, so the requirement to submit tax returns can arise well after the administration has commenced.

If you would like any advice on income tax reporting, our Wills, Trusts, and Probate Team will be more than happy to assist. You can contact us by email at info@leathesprior.co.uk, or by telephone on 01603 610911.