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Income Tax and Capital Gains Tax in Estate Administration

The administration of an estate following a death involves far more than simply obtaining a grant of probate and distributing assets. Personal representatives (“PRs”)—whether executors or administrators—must also carefully manage the estate’s ongoing income tax and capital gains tax (CGT) liabilities throughout the administration period.

Failure to deal with these tax obligations correctly can expose PRs to personal liability, as well as potential interest and penalties from HM Revenue & Customs (“HMRC”).

The Estate Administration Period

The administration period begins on the date of death and ends when the estate has been fully administered and all assets have passed to the beneficiaries. During this time, the estate is treated as a separate taxable entity for both income tax and CGT purposes. PRs are responsible for:

  • Collecting and safeguarding estate assets
  • Settling debts and liabilities
  • Dealing with inheritance tax (IHT), income tax, and CGT
  • Distributing the estate to beneficiaries

The tax position during the administration period differs significantly from both the deceased’s lifetime and the post-distribution position of beneficiaries, making specialist probate and tax advice essential.

Income Tax During Estate Administration

Upon death, an individual’s personal income tax position comes to an end. PRs must ensure that all income up to the date of death is accurately reported to HMRC. This may include:

  • Employment income
  • Pension income
  • Rental income
  • Savings interest and dividends

If the deceased was within self-assessment, a final self-assessment tax return may need to be submitted.

Post-Death Income

Any income generated by estate assets during administration is taxable on the PRs. Common sources include:

  • Bank and savings interest
  • Dividends from investments
  • Rental income from property
  • Business income

The estate is taxed at the basic rate application to PRs:

  • Savings income: 20%
  • Dividend income: 8.75%
  • Other income: 20%

PRs do not benefit from a personal allowance available to individuals.

Distributing Income to Beneficiaries

Where income is distributed to beneficiaries during the administration period, the beneficiaries are treated as receiving estate income with a tax credit for the tax already paid by the PRs.

PRs should provide beneficiaries with estate income certificates showing the gross income and tax credit, enabling beneficiaries to report the income correctly on their personal tax returns.

Capital Gains Tax (CGT) on Estate Assets

One of the most common tax issues arising during estate administration is Capital Gains Tax (CGT). CGT may arise where estate assets increase in value during the administration period.

Assets passing on death are treated as acquired by the PRS at their market value as at the date of death. as a result:

  • Gains accrued during the deceased’s lifetime are effectively wiped out for CGT purposes
  • Any future CGT liability is calculated based on the probate value

For example:
A property bought for £100,000 but valued at £400,000 at the date of death, the PRs are treated as acquiring it at £400,000.

When CGT Arises

If PRs dispose of assets during the administration period and those assets have increased in value since death, CGT may raise. Common chargeable disposals include:

  • Sale of residential property
  • Disposal of investment portfolios
  • Sale of business assets

CGT Allowances and Rates

PRs are entitled to an annual CGT exemption, but only for:

  • The tax year of death
  • The following two tax years

After this period, no exemption is available to the estate. The current CGT rates applicable to PRs are:

  • Residential property: 24%
  • Other chargeable assets: 24%

PRs do not benefit from individual basic rate bands.

Why Tax Planning in Probate Matters

Income tax and CGT during estate administration are often underestimated. While inheritance tax planning typically receives the most attention, PRs must also proactively manage ongoing tax liabilities after death.

At Lawson West Solicitors, we regularly advise clients and work with their accountants to:

  • Minimising tax liabilities during estate administration
  • Ensuring full compliance with HMRC requirements
  • Protecting PRs from personal liability
  • Efficiently managing complex estates and asset disposals

Careful administration, accurate asset valuations, and timely tax filings can significantly reduce overall tax exposure.

Speak to Lawson West Solicitors

If you require advice on probate, income tax or capital gains tax during estate administration, our experienced team at Lawson West Solicitors is here to help.

We provide clear, practical guidance to ensure estates are administered efficiently and in full compliance with tax rules in England and Wales.

We are here to help