Declaring administration period interest to HMRC - must we close the savings account?

[Northern Guy]

My wife and I are nearing the end of probate for her late mother. She left a significant cash balance in savings accounts (excluding ISAs), which have been moved from her old accounts to a new one opened for probate administration with a building society. Closing the deceased's savings accounts of course triggered statements of gross interest earned, so we know these amounts. The total estate earnings from this and the subsequent period of administration gross interest, will exceed the £500 interest threshold ignored by HMRC, so we'll need to contact them to pay the 20% they're due.

Last I time I dealt with probate, many years ago, the only way to account for the estate interest earnings was to close that savings account (temporarily putting it on zero interest in a current a/c), triggering such an interest statement. As my wife will inherit the proceeds alone, and will want to store these for now in building societies, that means closing and then reopening a building society account just to calculate the gross tax declaration.

Can this be avoided?

[Pezza54]

Interest paid to estate accounts after the date of death, even if the interest accrued before the date of death, is treated by HMRC as the income of the personal representative.
Is the personal representative a higher rate tax payer?

[PallasAthena]

HMRC guidance here. Seems to be no requirement to close account. No mention of estate income being treated as income of PR.

https://www.gov.uk/probate-estate/reporting-the-estate

[Pezza54]

I'm definitely not an expert on tax matters.
I had read "TSEM7262 - Deceased Persons: Interest Received"
"Interest paid or credited after the date of death"
".........it is the income of the personal representative."

I am aware the guidance applies to trusts, settlements and estates. I'm not sure the same applies to interest on savings

[Northern Guy]

"Interest paid to estate accounts after the date of death, even if the interest accrued before the date of death, is treated by HMRC as the income of the personal representative.
Is the personal representative a higher rate tax payer?"

The PR is not a higher rate tax payer. As no interest will be credited to the building society account for many months, is there the option of treating this as zero for estate tax return purposes, that account then later becomes treated as hers, and when later it gets the annual interest credit , she declares that amount as her own gross interest in excess of a person's £1k allowance?

[Pezza54]

Please read TSEM7453 - Deceased persons: beneficiaries of estates - tax rules for income
You are confusing me
Your mother-in-law's accounts were closed and interest added to the accounts up to the date of her death
Your wife opened a personal representative's account in her name (as administrator and sole beneficiary of the estate) to receive funds from these accounts. Funds have been transferred.
Yes, she can leave this account open and any interest added will be treated as her income

Have I answered your question?

[PallasAthena]

I do not find it credible that the income from the estate funds that the PR is responsible for is combined with that individual's personal income to calculate their overall tax position. They are separate legal capacities.

[Pezza54]

I think your right, Pallasathena
Although in OP's case his wife is the sole executor and beneficiary. So I don't see why the funds transferred to his wife's PR account, this account can't remain open and future interest credited to this account is treated as his wife's income
IMO his wife could transfer estate funds straight into her own account. I did this myself when I was executor and had a bank account with no money in it. I transferred money (actually posted cheques) to beneficiaries from this account

[Northern Guy]

PEZZA54 - I've read TSEM7453 and it confirms as I thought that the interest added to the deceased's savings accounts at closure (note after death as probate had to be first obtained) falls in the period of administration and so is for the executor to declare. Is anything still confusing?

PALLASATHENA - I take your point about the beneficiary being a separate legal entity from the estate in period of administration. The beneficiary would benefit from the £1k Personal Savings Allowance whereas the estate has no such allowance.

PEZZA54 - If the executor transfers the balance of the probate building society account to her own personal account at the end/distribution, as I think you're saying you once did, then interest will still be added to that BS account on its first anniversary. Meaning the beneficiary is gaining the £1k personal savings allowance for that interest that the estate is not due.

I was tying to explain to my wife why, in order to wrap up the administration of her late mother's estate, she must close the probate BS account, then declare its gross interest to HMRC and pay 20%, then distribute back to herself. She would then have to open a new BS account (there or elsewhere) to hold the funds going forward. Close then reopen in other words.

It's sounding like nothing has changed in a few decades - am I correct?

[Pezza54]

Please read the guide "What to do when someone dies" at www.natwest.com
An executor bank account can be opened before probate to receive transfers of funds from the deceased's accounts
Many of the high street banks and building societies now release up to £50k without probate. The bank will probably want to take a copy of the death certificate, will (if there is one) and PR id

You stated she left significant cash balances so am I right in assuming the banks would not release funds until the probate grant?
When she obtained probate and asked the banks to release funds in the closed accounts, can she not calculate how much interest has been added to the account (estate funds) by subtracting the amount in the account at the date of death from the total amount transferred?

[Northern Guy]

Please read the guide "What to do when someone dies" at www.natwest.com
An executor bank account can be opened before probate to receive transfers of funds from the deceased's accounts
Many of the high street banks and building societies now release up to £50k without probate. The bank will probably want to take a copy of the death certificate, will (if there is one) and PR id

You stated she left significant cash balances so am I right in assuming the banks would not release funds until the probate grant?
When she obtained probate and asked the banks to release funds in the closed accounts, can she not calculate how much interest has been added to the account (estate funds) by subtracting the amount in the account at the date of death from the total amount transferred?

Cash funds exceeded £50k so probate was required to release the funds. These accounts were closed once the building society which held them received the grant of probate, and at closure they calculated and added the interest up to that point. This total, balance + gross interest, was transferred into a new account at that same building society, opened for probate purposes as there were other matters delaying distribution many months. The aforementioned closure interest will have to be declared to HMRC as it fell during the period of administration and exceeded the £500 limit otherwise ignored by HMRC for an estate.

We are now at the end of the period of administration, and my question concerned the interest earned on the new probate account, and simply whether it was possible to account for this sum too, itself over £1k, without having to close this new account as well, to force interest calculation.

[Pezza54]

When you say delaying distribution of the estate, what do you mean?
Is there a reason why your wife couldn't transfer funds direct into her own personal account when she received the grant? She is sole beneficiary

[Northern Guy]

There was a house to be sold too, one half was due to my wife, with complications around the probate needed for the other half (her late husband) likely to cause delay. So she knew the estate would be in administration for a good few months, hence keeping the cash sum earning interest. I've never heard of transferring part funds to a beneficiary before the final distribution point is reached, i.e. all assets collected, debts paid and tax accounted for.

[Pezza54]

IHT normally has to paid before the probate grant. Banks usually release money from the deceased's accounts to pay this tax and for funeral expenses
After the grant the executor or administrator can, with care, pay part of their inheritance to beneficiaries, holding back a reserve amount of money for possible creditors or HMRC

[PallasAthena]

There's no problem with making interim distributions to residual.beneficiaries if the funds available permit it. Of course the Executor(s) must ensure they have retained sufficient funds to pay all.forseeable debts and taxes.

My OH was one of five residual beneficiaries where the estate executor was a professional trustee company and they made no fewer than four interim distributions over two years as assets were realised into cash.