The R185E and maximising estate income for charities

When administering an estate, Executors have a duty to pay income tax on income received during the period of administration. However, the tax position of the residuary beneficiaries of the estate determines whether they can claim back some or all of the tax paid by the Executors or have an additional liability to income tax.

What factors have impacted estate income?

A number of factors in recent years have impacted the income an estate receives, and the tax paid by the Executors:

• A lengthy period of low interest rates on bank deposits from 2009 to 2022. By historical standards, interest rates remain relatively low despite the increases since 2022.
• Use of bonds and ISAs as tax efficient vehicles for investments and in the case of ISAs, the "tax free" wrapper continues post death.
• Simplified income tax reporting requirements for "simple estates" means small amounts of gross income do not need to be declared.

Clearly, more income passing to beneficiaries free of tax is to be welcomed but Executors still need to be considerate of when they should be providing the residuary beneficiaries with information about the income and tax paid using HM Revenue & Customs form R185 Estate Income (R185E).

This is particularly important where one or more Charities benefits from the residue as they will be able to claim back tax paid by the Executors on income received by the estate such as rent, bank interest and dividend income.

Whilst professional Executors and estate practitioners advising lay Executors should be aware of the need to provide timely and correct information, it is perhaps not at the top of the list whilst the estate administration is ongoing and there can also be difficulties if lay Executors are acting without legal or tax advice.

Guidance to follow

The R185E should be provided as soon as possible after the end of the tax year in which a distribution has been made or at least a discussion between the Executor and beneficiary about this to establish expectations.

Tax can be reclaimed by the beneficiary for the previous six years so there is some flexibility with HMRC if the Executors do not provide the information swiftly.

• The Estate Accounts are a key tool in preparing the R185E.
• If preparing the Estate Accounts is viewed as a "last thing" task, this delays the R185E being produced and has a knock-on delay to any tax being reclaimed.
• Errors on the Estate Accounts can lead to incorrect information being transferred to the R185E.

As a beneficiary, it is advisable to check the R185 once received so any errors can be corrected. Common errors are:

• Incorrect tax year stated
• Not signed by Executor
• Income stated is for the entire estate and not the beneficiary's actual share.
• Gross/net figures and tax paid not stated correctly or do not correspond.
• Income type not given in the correct category box on the form.

If you are a beneficiary and no R185E is provided or you suspect the information provided on the R185 is incorrect, seek clarification from the Executors.

A cost/benefit exercise may be needed before insisting on the production of R185E particularly for small estates or if professional fees will be incurred in doing so.

Care needs to be taken if the estate has been ongoing for several years and the income accumulated over that period is being dealt with on the R185E when interim distributions are made. It sounds obvious but the R185E should only deal with income if it has actually been distributed to the beneficiary.

For example:

John died in 2022 and left his estate to a charity. His assets consisted of a bank account containing £150,000 and a property portfolio of commercial premises valued at £3million which produces rental income. The bank account has been closed by the Executors. It has taken some time to find the right buyer for the commercial premises although a sale has now been agreed. Since the date of death, the income received from the commercial premises (after tax) is £340,000. In 2023/24 the Executors decide to make interim distributions to the charity of £300,000.

The Executors cannot issue an R185E to the charity for all the net income received (£340,000) as they have only distributed £300,000 so far. The surplus income is carried forward to the next year so would be shown on the R185 for 2024/25.

Remember

In summary, as Charities seek to maximise gifts they receive from estates, reclaiming tax suffered on income can boost those gifts but obtaining the right information quickly to do so can be challenging. Please contact a member of the if you would like further information or guidance on this topic.

Written by Kerensa Cooper, Senior Probate Executive