by David Watkinson www.warkinsonblack.co.uk
Changes in taxation can sometimes have unexpected consequences, and this applies to the changes in the taxation of bank interest and dividends introduced this year.
Previously, interest and dividends were both effectively received net of basic rate tax. However, since April this year they have both been received before the deduction of any tax, and instead individual taxpayers have been given additional tax free allowances of £1,000 per annum in respect of interest and £5,000 per annum in respect of dividends.
Tax on any relevant income received above these allowances is payable at 20% on interest and 7.5% on dividends
These changes have had the effect of:
*removing many pensioners and other low earners from the need to reclaim overpaid tax on interest; and
*removing many taxpayers with moderate investment income from self assessment, or avoiding the need for them to register; whilst at the same time
*achieving the aim of increasing the tax payable by director/shareholders of small limited companies who pay themselves through dividends.
The changes, however, have had another consequence for anyone dealing with the estate of a deceased person. Tax is payable on any income received by the estate during the period of administration, but neither of the new allowances are available. Therefore, in theory, the personal representative of an estate receiving any interest or dividends should inform HMRC of the liability and complete a self assessment tax return.
HMRC have partially recognised that this will place an unreasonable burden both on themselves and on estates receiving only a small amount of income. They have, therefore, announced a concession that tax of £100 or less due on interest received by an estate in administration need not be reported, effectively giving the estate a savings allowance of £500.
However, there is no similar concession on dividends received. Therefore, all dividends received after April are taxable at the dividend rate of 7.5%, and the tax must be accounted for to the tax office on form R185 (Estate Income). When the net income is distributed to the beneficiaries it will carry a repayable tax credit of the tax deducted. Remember, this applies to all dividends received no matter how small!
Many people dealing with small estates are relatives of the deceased who are inexperienced in dealing with complex tax situations, and this certainly qualifies as complex. If they get it wrong then they could face being charged interest on any tax underpaid as well as penalties that could be out of all proportion to the tax “lost”. Let us hope that this is not the intention of either the government or HMRC, and that someone sorts this out in the very near future.
WatkinsonBlack are pleased to advise on these and other matters. They have considerable experience in all areas of taxation and businesss services, including providing a very cost-effective payroll bureau service. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us. Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.
