The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
During the period of administration, personal representatives (PRs) receive income arising from the deceased’s assets until they are sold or transferred to beneficiaries. They also receive income from bank accounts or other investments which they have set up to hold cash pending distribution of the estate. Income tax is paid at standard rates on these sources of income.
See the Income tax during administration guidance note.
This guidance note explains how the estate income is allocated to beneficiaries as taxable income so that the estate income is eventually taxed at the beneficiaries’ personal rates.
Beneficiaries’ entitlement to estate income, and consequently their liability to income tax, depends on the nature of their interest under the Will or intestacy. The most common type of interest which gives rise to an income tax liability for the beneficiary is an absolute interest in residue. This is described below. Other types of interest, which have their own particular features, are covered in the Beneficiaries’ estate income ― minor interests guidance note. These are:
limited interests in residue
discretionary interests in residue
successive interests in residue
However, some principles apply to all types of interest:
income received by the estate retains its character when allocated to the beneficiary. So if the estate receives dividend income, for example, and pays it to a beneficiary, it will be taxed as dividend income in the beneficiary’s hands
beneficiaries are primarily chargeable to income tax in the tax year of receipt, not in the year in which the income arose within the estate. They are charged on any amounts outstanding in the final year of the administration. This is explained in more detail below and the differences applicable to other types of interest are covered in the Beneficiaries’ estate income ― minor interests guidance note
all payments to a beneficiary are considered first as a payment of income to the extent that there is an outstanding income
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