Deceased’s estate – accrued but unpaid interest

[stewamax]

Assume X is sole owner of a one-year fixed-rate bond with annual interest.

X dies in December.

Could someone kindly confirm that the value of the bond plus interest accrued to the date of death (but not paid out) is the value both for:
- IHT
and
- Probate

and that the estate’s opening balance for the bond is also this value.

After April 5th, the executor submits an SATR for X and a Trusts and Estates return.

Q: Is the interest accrued (though not paid out) at the date of death the interest declared in the deceased’s SATR?
Q: Is the estate’s declared tax-year interest the accrued interest at April 5th less the accrued interest declared in the SATR (i.e. the deceased pays the accrued interest to the date of death and the estate the rest), or is the estate treated as an ‘individual’ who only declares interest when it is actually paid out (which will be in the new tax year)?

[scrumpyjack]

Yes the IHT value includes the accrued interest

Yes the estate then has to pay income tax on all the interest subsequentially received, so you can be in effect charged tax twice on the interest (40% IHT and the income tax on the gross interest). There used to be some special relief available, as I recall, but they abolished it.

Estates do not get any allowances on savings, income or dividends. Estates pay tax at the basic rates of 8.75% on dividends and 20% on any other income.

The beneficiaries may be able to claim the tax back. based on form R185 issued by the executor, and their own tax situation.

[stewamax]

Many thanks scrumpyjack.
To clarify your comment “..the estate ..has to pay income tax on all the interest subsequently received”, and bearing in mind that the bond hasn’t actually paid out (it will do so only on maturity or after probate, either of which will be in the next tax year), is the estate taxed:

- on total accrued interest for the tax year (which would imply double taxation since the deceased’s SATR will also be taxed on the portion before death, or if we include IHT, triple taxation!)
or
- just for interest accrued after the estate took over from the deceased
or
- not until payout (after maturity or probate)

[scrumpyjack]

The estate is taxed on interest RECEIVED, as any other taxpayer is, based on the date received. Accruals do not come into it. The deceased SATR will have included any interest RECEIVED before the date of death. It will not have included accrued but not yet paid interest. A tax return is submitted for the period 6 April to the date of death and a separate return by the executor for the period from the date of death til the next 5 April.

[stewamax]

That nails it! Thanks.
Probably my sloppy reading of HMRC TSEM7262 conflating accrued with credited.
This says (inter alia) "Only the interest which was either paid or credited prior to the date of death should be regarded as the deceased’s income chargeable as savings and investment income [i.e. goes on the deceased's SATR] ......If interest accrued between the last accounting date and the date of death, but was not paid or credited until after the date of death, it is the income of the personal representative [i.e. the estate] . Do not apportion it to and from the date of death". My glosses [..].

There is an interesting thread on this subject (and on the potential double taxation you referred to) in the Trusts Discussion Forum under 'Accrued income up to date of death'

[stewamax]

Fixed-rate bonds and anything else with annual interest could, depending on the date of maturity or interest, then presumably cause an estate to have no tax liability.
Assume Mr Deceased buys a £2M one-year FRB with annual interest on 6th April and dies on the 7th. Although the bond value (plus a day's accumulated interest) is liable to IHT, the estate would presumably pay no tax on this bond interest if the estate were probated and fully distributed before next 6th April. The legatees would pay, but their tax regime may be better (or if they pay HRT, worse) than the estate's blanket 20% (dividends apart).

If this is correct, is it 'sensible tax planning' for an executor/administrator to adjust an estate's wind-up date to minimise overall tax paid, or is it illegal?

[stewamax]

[Now fully answered in Legal area]