How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask TonyTax Your Own Question
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15914
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
Type Your Tax Question Here...
TonyTax is online now

If a company pays a dividend into the estate of a deceased

Resolved Question:

If a company pays a dividend into the estate of a deceased person, who pays the tax on the dividend, if the dividend has to be used by the estate to pay of debts of the deceased. Is it the estate or will it be the residuary beneficiary who is the wife of the deceased.
If the residuary beneficiary only receives money from the equity of the marital home after it has been sold, will the residuary beneficiary pay tax on the dividend used to pay of the mortgage?
Submitted: 1 year ago.
Category: Tax
Customer: replied 1 year ago.
The dividend being received is prior to the company going into voluntary liquidation so the assets of the company can be split according to the percentage owned by the shareholders. My husband held a 41% share. If the proceeds were received from the liquidation, which had been agreed although now we have discovered not formally, the tax payable I believe would have been approx 10% as capital distribution. Out of spite the remaining shareholder who is aggrieved at having to liquidate the company had declared the proceeds of monies held by company as dividends where the higher tax rate is payable, to diminish what is left in the estate. The administrator of the estate is saying that I will have to pay 30% tax on the dividend received by the estate as I am the residual beneficiary, the estate paying the 10%. The problem being is the debts of the estate outweigh the monies being received, so the only monies I will receive is a very small proportion of the equity of the marital home after its sale. I have had conflicting advice in regard to the tax payable, I have had my accountant and solicitor saying that is the estate that will have to pay the tax applicable, but the tax adviser to the administrator is saying that I have to pay it as I am the residual beneficiary, so in effect i will be inheriting a debt. Your advice is much appreciated.
Expert:  TonyTax replied 1 year ago.
Hi. I'm preparing an answer for you and will post it here soon.
Customer: replied 1 year ago.
I was looking to have answer this evening, will that be possible? Many thanks.
Expert:  TonyTax replied 1 year ago.
Hi. When a dividend is received by a deceased estate, it is income of the estate. As dividends are currently paid net of a notional 10% tax credit whether to an individual or a deceased estate, there is no further tax liability for the deceased estate or a basic rate taxpayer. Take a look here for information on how estate income is taxed and at what rate. If and when the dividend is paid out to the estate beneficiary or beneficiaries, the beneficiary or beneficiaries will only have tax to pay if he/she or they are higher rate taxpayers. Debts are offset against the asset to which they relate and it is very difficult to claim debts and administration expenses against income. However, if you look here under "Residuary Beneficiary", that beneficiary is taxable on the lower of sums paid out to them from the estate in the year of assessment or the amount of income that has arisen on their share of the residue. Whilst I'm not an expert on deceased estates which are close to being insolvent, I cannot see how you can be required to pay tax on income you have not received, particularly in view of the text in bold above. Some estates are technically insolvent and any income received during the administration period is absorbed by debts so there is no possibility of an income payment. I hope this helps but let me know if you have any further questions.
Customer: replied 1 year ago.
Thank you for your reply, I am still slightly confused. For instance, if the estate has debts of 1.5 million, including mortgage liability. The assets received are one million comprising of £400k cash and £600k dividend payment, plus equity in home. Some cash has already been used to pay some debts, leaving just the dividend payment which has just recently been received to cover remaining debts. the dividend payment will cover legacies in will and solicitors fee's, so to cover mortgage debt, property will be sold, leaving me with all or part of the equity left, depending on how bad things get. So will I be paying tax n the equity received on my home? That will not amount to £600k of dividend received, lucky if it will be £100k, so who will be paying the tax on the dividend received by the estate? Is there only ever 10% payable on the dividend? Why am I being given the figure of 30%? Many thanks.
Expert:  TonyTax replied 1 year ago.
If your income is over £42,385 in the current tax year, the dividends that go into the 40% tax band are taxed at the higher dividend rate of 32.5% less the 10% tax credit. If your income is over £150,000 in the current tax year, the dividends that go into the 45% tax band are taxed at the additional dividend rate of 37.5% less the 10% tax credit. Can you tell me how much the house will be sold for and how much of that is effectively owned by the deceased estate? How much is the mortgage?
Customer: replied 1 year ago.
I am desperately trying to stay in my home as I don't know where I am going to live, I have lived here twelve years along with my daughter and was totally dependant on my husband when he was alive. The house may fetch £900k, the mortgage is £650k, I don't think all of equity will come over to me, I don't know exactly what monies will be left. Two months ago, it was looking like I could be left with all the equity, then there may have been a slim possibility I could stay here and continue to fund the mortgage, but since the large dividends have been declared recently prior to the liquidation, the tax payable on the dividend I have been told is far greater, therefore the monies coming into the estate, have shrunk.
Expert:  TonyTax replied 1 year ago.
Can you summarise the total assets owned by the deceased estate and its total debts. Was the house jointly owned with your husband? If so, was that as tenants in common or as joint tenants? Only your late husband's share of the property should be included. Were both your own and your late husband's name on the mortgage?
Customer: replied 1 year ago.
No the property was just in my husband's name and only my husband's name on the mortgage. Assets were £400k in insurance polices, 41% share of company, £600k given for probate purposes, plus equity in home. Debts are mortgage debt of £650k legacies of £300k (written in will by mistake long story!) directors loan of £170k Other debts totalling approx £200k, plus solicitors fees possibly totalling £150k, this has been going on for almost seven years now with various problems! I don't know the exact figures yet as they have been changing.
Expert:  TonyTax replied 1 year ago.
Debts have to be settled before legacies. The estate appears to have assets of £1.9 million (£900,000 + £400,000 + £600,000) and debts of £1.170 million (£650,000 + £170,000 + £200,000 + £150,000) so there are sufficient assets to pay the legacies of £300,000. There will be IHT to pay at 40% of the capital? Has that been paid? As I said in the bold type in an earlier post, as the residuary beneficiary, you are taxable on the income paid out of the estate, not on money you don't receive. Debts and legacies come out of capital first, then income. Debts cannot be inherited by an estate beneficiary unless they are named on the debt. I find it hard to believe that this has been going on for seven years.
Customer: replied 1 year ago.
Yes at the expense of my daughter and I losing our home which was most certainly not supposed to happen. I have probably miscalculated somewhere as there wont be £400k equity left. If that is the case, then will have to pay £160 tax if i was to inherit £400k from equity from sale of my home? You would not believe half the things that have happened and the whole thing has been orchestrated by the remaining shareholder of the company to prevent me inheriting the shares belonging to my husband, which was the instructions in his will. My husband's only source of income was dividends from the business, which i was dependant on along with my daughter. After my husband died, these were stopped. It took 4 years for my husband's shareholding to finally be transferred to his estate by the remaining shareholder. No dividends were paid out for six years. Properties belonging to the company sold undervalue in the space of two weeks not being advertised to the public. As soon as the voluntary liquidation was agreed (or so I thought, it had not been formally agreed) Dividends have been free flowing!! The result being a tax implication payable by me it looks. If debts and legacies come out of the capital first, once the capital has gone, which it already has, then the legacies and mortgage debt have to come from the dividend payments? If that is the case, does income tax become payable by the estate at that point?
Customer: replied 1 year ago.
I am not sure what you mean about the IHT on the capital?
Expert:  TonyTax replied 1 year ago.
IHT is only payable on the net assets and the estate will have a nil-rate band on which IHT is charged at 0%. The nil-rate band has been £325,000 since 2009/10. It was £312,000 in 2008/09 and £300,000 in 2007/08. Anything left to you will be exempt from IHT.
Expert:  TonyTax replied 1 year ago.
I'm no lawyer but I'd consider taking legal action against the other shareholder. The estate will not have a tax liability on the dividend. If any part of the dividend is paid to you, you will be liable for higher rate tax on it. I'm not a lawyer so I cannot be sure that the dividend is protected from the creditors. I'll take another look in the morning.
TonyTax and other Tax Specialists are ready to help you
Customer: replied 1 year ago.
Ok thank you, ***** ***** help. I will probably give you a call tomorrow, is there a time more convenient for you?
Expert:  TonyTax replied 1 year ago.
You can post any follow up questions here. I will see them and get back to you. I'm going to do some more research on this.

Related Tax Questions