Since HMRC withdrew form R27, which was used to collate information on the income received, and tax paid, by the deceased during the tax year in which they died, the situation regarding whether a repayment is due to the estate (or indeed a payment to HMRC) is far from clear. There can be a loss of possible reliefs, late lump sum claims for tax from HMRC and just plain confusion.
Previously HMRC used the information from the R27 to calculate any underpayment or overpayment of tax. Some people try to deal with estate tax themselves, or using unqualified advisors, and due to many of the forms either not being returned or being returned with incomplete or inaccurate information, HMRC decided to withdraw the form altogether, along with the form P161(W) which asked the surviving spouse about new income sources.
Since the withdrawal of the R27 income tax has been ever more complicated. There has been the introduction of the personal savings allowance of £1,000 (£500 for higher rate tax payers) and the dividend allowance of £5,000 (£2,000 in 2018/19). In addition, the new trading and property income allowance of £1,000 was introduced for the tax year 2017/18.
Where the deceased prepared annual self assessment tax returns, then a return will normally be required anyway for the period from the 6 April up to the date of death. The problems arise where the deceased was not submitting tax returns.. If they died before the end of the tax year and were in receipt of private pensions (where tax is deducted at source) then due to the way in which the PAYE system operates a tax refund is often due to the estate.
Additionally, following the changes, it appears that HMRC may not take into account at first that the surviving spouse’s income has changed. This may result in tax being due on the increased income, but HMRC won’t find out until later – leading to lump sums being repayable later by the surviving spouse(s).
It appears that HMRC is relying on information acquired from third parties (pension providers, banks etc) and will only write saying “This is what we know, please confirm it”. This can lead to errors and omissions.
By checking the tax position of the deceased for the period up to the date of death any repayment due to the estate can be claimed, or payment made to HMRC if required. This can be dealt with in a timely manner and enable the pre-death tax affairs to be completed with no fear that HMRC may look at these at a later date, long after the estate has been finalised.
In addition, it is wise to ensure that the surviving spouse reviews their own personal tax position and engages with HMRC in this respect to ensure they do not miss out on any unclaimed transferable married couples allowance in the year of death - or discover they owe money for tax .
If you would like any further advice relating to the above or your own personal tax affairs please contact Elaine Morgan on 01604 463120 or email firstname.lastname@example.org