Following Budget 2015, the rules for the taxation of dividends and interest were changed fairly dramatically. Here we look at the effect the changes have on a deceased's estate for income tax purposes but, first, let's review the changes for the living.
Dividends are subject to special rates of tax, which are determined by the other taxable income in the year.
The non-repayable tax credit attached to dividends has also been abolished.
For individuals, the current effective rate of tax for dividends is shown in the table below, together with the old effective rates:
|Basic Rate||Higher Rate||Additional Rate|
|Effective rate - before April 2016||0.0%||25.0%||30.6%|
|Effective rate - from April 2016||7.5%||32.5%||38.1%|
In addition to the tax rate changes, a new "dividend allowance" of £5,000 now applies for individuals. This allowance exempts from tax the first £5,000 of dividends received, outside of an ISA. Income received in an ISA remains tax free.
The dividend allowance is not a true allowance like the personal allowance. It is essentially a 0% tax band for the first £5,000 of dividend income. However, the amount of dividends falling into the allowance will be taken into account when determining the tax bands. This may see higher rates of tax being paid for some individuals.
Unfortunately it's not easy finding detailed information of the changes for an estate, even via the HMRC website, but we at Gepp and Sons have done some digging and probing to discover what the rules actually mean - in reality, it took a few 'phone calls and plenty of "on hold" time to talk to someone who was au fait with the rules (or as near as we could get). So, without further ado, let's get to the fun bits.
Ok, so my definition of fun may not be the same as most but you're reading this so we have more in common than you might wish…
The first piece of important information provided by HMRC was that the rules mentioned below are only in place for 2016/17. It seems that estates were overlooked when creating the new legislation and the position will be formalised.
Interest, as you'll be aware, is now paid gross. Income in the period of administration is taxed at the basic rate, currently 20% for non-dividend income, which means that there will always be an income tax liability during the period of administration. Thankfully this rule is subject to a de minimis amount of £100. Where the only income received is interest of less than the de minimis, there is no need to notify HMRC of the tax due. This includes any client account interest that may be earned on funds held for the estate.
Part of the changes to the taxation of dividends included the introduction of a £5,000 dividend allowance for individuals. Initially, it was considered that this allowance, or part at least, would be available in the period of administration of an estate. It has been confirmed to the author, and trusty sidekick, that the dividend allowance will not apply. At all. Period.
Income received by the executors or personal representatives is taxed at the basic rate and nothing is charged to the higher or additional rate tax bands. What this means is that all dividends received in the period of administration will be subjected to basic rate tax at 7.5%. Prior to April 2016 any dividends received could be essentially ignored in determining the income tax position of the estate as the non-repayable tax credit attached to dividends cancelled out any tax levied on the income.
However, any income received since the rule changes will now have a liability to report to HMRC. Unlike with interest received by an estate, there is no de minims amount and strictly speaking all dividends will be reportable.
Death is not something that can always be predicted so most people won't have the opportunity to plan when they receive their dividends. In fact, the majority of individuals only own shares in companies listed on a stock exchange and will have no control over the payment of dividends, let alone the date of their passing.
When the planets reach alignment and the soon-to-be deceased has a degree of control over the payment of dividends - most likely from an unquoted family business - then it may be worthwhile considering whether to make payment before death in order to utilise the £5,000 dividend allowance and/or personal allowance. Obviously, care will need to be taken to ensure that other shareholders are not affected and that other income in the period is not pushed into a higher rate tax band. The tax saving may not be huge but, in the words of a famous supermarket chain, every little helps…
This is not legal advice; it is intended to provide information of general interest about current legal issues.
If you would like to understand more about the changes and how they may affect you, please speak to your usual Gepp & Sons contact or Marc Dorsett on 01245 228146.