Bank Interest Accrued at Date of Death

[sirp2000]

My fiancee's grandmother died in May and my fiancee is an executor and beneficiary to the extent of one third of the residue after specific bequests.

The deceased held a large Barclays 2 year deposit bond on which no interest was paid prior to death but on which £11,700 gross interest had accrued. The form IHT400 and IHT406 therefore need to show the original capital plus the £11,700 on which 40% tax is due.

However, it seems that the executors will also need to pay 20% income tax on the gross interest for 2010/11 (post death) as the interest arose after the date of death.

Is it right that 60% tax is paid with no relief? Or should the IHT400/406 just show the capital plus net interest of £9360 (ie £11700 less anticiapted income tax @ 20%).

As an alternative, would it be possible to declare the £11700 on the tax return to date of death as her grandmother had a lot of unused age allowance?

Thank you for your help.

[Lee Young]

The net amount is an asset for IHT purposes. It is also income in the course of the administration and can not be declared for the period up to the date of death.

There is relief for this double taxation if the beneficiaries receiving rthe residue of the estate are higher rate tax payers.

[sirp2000]

Many thanks for your very useful answer.

So the IHT406 should show the capital plus £9360 rather than £11700?

The interest is being paid gross as it is a time deposit over £50000, so presumably the executors will have to pay tax at 20% on the amount arising post death?

Unfortunately the beneficiaries are not higher rate taxpayers so it seems that tax of 52% is suffered on this interest.

Cheers.

[maths]

I would suggest that the gross £11,700 is subject to IHT.

The £11,700 is then subject to income tax at 20% on the part of the executors.

Income tax relief for the double tax is only available to residuary beneficiaries subject to income tax at the higher rate.

[Lee Young]

Of course - yes Maths is correct.