Income generated by an estate during the administration period — such as dividends or rental income — can be distributed to beneficiaries. However, it’s important to note that this income is taxable and must be reported on the beneficiaries’ tax returns. Additionally, the estate itself is liable for tax on income earned during the administration period.

Types of Legacy

The tax position of the beneficiary depends on the nature of the legacy. Below are the common types of legacies in the UK:

• Pecuniary Legacy: This is a specific sum of money left to a beneficiary. The beneficiary is entitled to receive only this sum, and no more.
• Specific Asset Legacy: This could involve assets such as shares, property, or personal belongings. If these assets generate income (e.g., dividends or rental income), the beneficiary is entitled to that income from the date of death. Executors will have paid tax on this income and must then pass it to the beneficiary along with a tax certificate detailing the income and taxes paid. The beneficiary will be taxed on the gross income, but will receive a tax credit for the amount already paid by the executors.
• Residuary Legacy: This refers to what remains of the estate after taxes, expenses, and any specific or pecuniary legacies have been settled. A residuary legacy can be either absolute or limited:
  • Absolute Interest: The beneficiary is entitled to both the capital and income generated by the residue of the estate.
  • Limited Interest: The beneficiary only receives the income generated by the capital but does not inherit the capital itself.

Residuary Interest

Beneficiaries with a residuary interest are taxed only when income is distributed during the administration period. Executors pay tax at the basic rate on this income, and the beneficiary receives a tax credit, certified by the executors on form R185.

If an asset is transferred to a residuary legatee during the administration period, it is treated as a distribution of income, based on the value of the asset at the time of transfer.

Finally, any undistributed income is deemed to be received by the beneficiary in the tax year when the administration of the estate is completed.

Speak to an Expert

If you are the personal representative of an estate and need guidance on how income from the estate is taxed, don’t hesitate to reach out. Our team is ready to assist you with any questions or concerns.