Snippet

As a beneficiary of my late mother's UK estate, I have a question about any income, or capital gains from assets that are disposed of by the executors during the estate administration process.

In trying to read up about this, my understanding is that any income, ie interest on accounts that accrues during probate will be payable to me as one of the residuary beneficiaries. Or at least a portion of it. This will then be reportable on my US tax return next year, assuming the income is distributed to me in the current year of course.

However, what I am somewhat confused about is the treatment of capital gains from disposed assets, if the executors sell, say, property or shares at a profit ( above date of death value), during the estate administration. My reading tells me that the estate itself is responsible for paying any CGT due, and the beneficiaries have no liability, at least on the UK side. But what about the US tax treatment of this? Am I required to report and pay taxes on any profits from the sale of assets that take place during probate whilst they are still held by the estate? I would have to think the answer is yes, but cannot find anything clear on this.

BTW, I have not been left any particular asset or property, everything is just being sold/ cashed in by the estate, and the money distributed amongst the beneficiaries.

Does anyone have any knowledge of this particular matter?

Thanks.

Nutmegger

I wrote this up after my experience with a UK bequest a few years ago, and hope it may help. (The period while the executor is probating/managing the state is referred to as the "administration period.")

When I received an inheritance, the Executor of the Estate wired it directly into my US account, in dollars, with no fees. If you do a search you will find a number of threads on the topic of inheritances, including the form to file with your US taxes, the 3520, if the bequest is over $100,000. (Don't worry, it is purely informational, no taxes will be levied!) I received a UK Revenue form R185 from the Executor, and was advised by him (an accountant) that the form showed my percentage of the net income during the administration period and the tax already deducted therefrom. He told me the total gross figure that I needed to declare on my US tax return and the amount of UK tax that had already been paid thereon that I also needed to indicate. I was to convert both figures into USD and he suggested that I use the exchange rate on the date on which the legacy funds were transferred to me.

Snippet

Thanks for the reply. Yes, I understand about the informational reporting requirements. 3520 etc.

However, my concern is specifically with how any capital gains realised by the estate will relate to me for US tax purposes. I know that if I inherited a specific asset, say a house, then after I took ownership, if I later sold it I would personally be liable for any capital gains upon the sale. But I am unsure how this relates to dispositions of these types of assets by the estate during the administration period, when the executors liquidate everything and just distribute cash to the beneficiaries. Especially if I am understanding correctly that there is no liability to the beneficiaries for CGT as the estate is responsible for paying it.

durham_lad

The disposition of assets during the administration process and any taxes arising as a result are due to the estate so that those taxes are paid out to HMRC before the resulting cash is distributed among the beneficiaries. With my FIL’s estate my wife and her siblings received most of their share and then had a few months to wait while the final tax return was completed from the monies the executor had put aside to pay those taxes due, and they received a final small sum.

Cook_County

The estate is a specified foreign financial asset and will be reported by you on Form 8938. Distributions from the foreign estate are reported on Form 3520.

Nutmegger

I don't believe the 8938 is necessary. The estate is not an asset of the OP during the distribution period. He only comes into the picture when he receives his share at the point of distribution, after the estate's executor has paid its relevant taxes and apportioned them to the legatees.

Snippet

Thank you for your replies. I do understand about all the informational reporting required, and I am aware (mostly), of how the estate administration works on the UK side. But that is not my question here.

Again, my concern specifically is about the US tax treatment of any income accrued, or capital gains that the UK estate may realise by the disposition of the assets that occur during probate. My understanding is, that it is the residuary beneficiaries who are entitled to receive any income/gains from the estate administration period. So it follows then, that part of the cash distribution I will eventually receive could contain some amount that will be attributable to that, minus any taxes that the estate had to pay to HMRC.

Everything I have read so far says that cash received from a foreign estate is not taxed on the US side, but I cant help thinking that cant be quite right, because if a part of it is technically income or capital gains realised during the estate administration, that portion surely must be taxable. Also, if taxes were paid to HMRC by the estate ( on income and/or capital gains), then can I claim a tax credit, or a refund of those as a non UK resident, or do I essentially get double taxed? Nutmegger , you mentioned receiving an R185 for income from the estate you were a beneficiary of. Were you able to take the UK taxes paid as a credit or claim a refund from HMRC, as I am assuming you had to enter the gross amount as income on your US return?

Nutmegger

I think you are really trying to over-complicate this. There is no double taxation. I'm afraid that my memory only extends to what I wrote above: I received a UK Revenue form R185 from the Executor, and was advised by him (an accountant) that the form showed my percentage of the net income during the administration period and the tax already deducted therefrom. He told me the total gross figure that I needed to declare on my US tax return and the amount of UK tax that had already been paid thereon that I also needed to indicate. I was to convert both figures into USD and he suggested that I use the exchange rate on the date on which the legacy funds were transferred to me.

Giantaxe

I concur with what Nutmegger says about income produced during the time of the estate before distribution. That is exactly how it worked with my mother's estate and I claimed a foreign tax credit for the tax paid to the UK. As far as capital gains go, I am unfamiliar with how the UK taxes such gains in an estate but given the US grants a stepped up basis to the date of death, how much gain is likely to accrue to the estate? At least for US tax purposes, cost of selling would be deducted from the sales price to determine any gain. It's been a while but I recall this discussion regarding my mother's house and concluded there really wasn't a gain to the estate before it was sold. I guess if it's a quickly appreciating market or the house is not sold for a long while, the calculation would be different.

Cook_County

This is clear from the official instructions to Form 8938. Form 8938 is required for each year from the year of death until the estate is closed.

Nutmegger

Surely an estate is not seen as an investment vehicle and thus no filling (which would also be duplicative) is required?

Snippet

Regarding the 8938, the instructions say to report if you know or have a reason to know based on readily available information the value of
your interest in the estate. If you do not know or have a reason to know then use a value of zero.

Since my mother died in December last year and I still have not been given an amount as to what I will eventually be receiving, as the estate is still under administration, I cant see how I should have to file an 8938 for 2020. My mothers estate did not even begin to be dealt with until this year, and as I said, final figures are still not determined as I am to be one of the residuary beneficiaries. I understand I will likely need to file for this year, but last year? I dont see how I would be expected to. What figure would I put? If the value is zero then I dont need to file the form as I dont meet the thresholds for reporting. Am I missing something here?

Cook_County

Congress decided that the penalty for not filing an 8938 is $10,000 per form. Personally I'd file to reduce risk. It takes 5 minutes to complete an 8938; filing Form 8938 is the cautious approach.

Snippet

So, are you saying I should file the form and just put a value of zero for the estate? Or are you saying I should wait until I do obtain a figure for my residual interest and then file the form retroactively for 2020?

If it's the former, since the residue of the estate is still to my knowledge not yet determined, and certainly was not in 2020, then using the value of zero means I do not have a filing requirement. If the latter, then again, this just does not make sense to me, I could be filing the form late, and may incur a penalty. Surely I would have had to have been able to determine the value of my interest by the end of the year in question. (2020).