The recent crackdown on tax evasion means the tax authorities are almost certain to be taking a closer look at the payment of inheritance tax. Typically, the estates of around 12,000 people are liable to inheritance tax each year and many of these are dealt with by a family member or friend acting as a lay executor. Executors can be personally liable in the event of mistakes – not to mention the potential for further investigation of their tax affairs – meaning accuracy is essential.
This Briefing Note provides some practical advice for executors of an estate and highlights common pitfalls.
What are my main responsibilities as an executor?
Essentially, the executor's job is to administer the estate of the deceased according to his or her wishes as stated in the Will. This means collecting all assets, paying any debts and distributing what is left to the beneficiaries. If the estate – that is the value of all the individual's assets including cash, possessions, property and any investments minus any debts – exceeds the 'nil rate band' then the executor is responsible for submitting a tax return (IHT400) to HM Revenue and Customs (HMRC).
Usually where no inheritance tax is due, the estate is referred to as an 'excepted estate' and a simpler IHT205 can be submitted to HMRC.
How can I get hold of the Will and essential documents?
Firstly, go through the deceased's files to find key items such as the Will and bank statements. If you can't find their Will, it's worth contacting their solicitor or bank. Banks routinely keep Wills in safe custody for clients. If the deceased did not make regular use of a solicitor, a first port of call would be the firm who advised on the purchase or sale of their home or a divorce, if appropriate.
Bank statements are invaluable as they reveal standing orders, direct debits and sources of income which may indicate life insurance policies or similar which you will have to trace in order to ascertain their value. A copy of a previous tax return, if prepared, is also helpful as it should highlight all income producing assets and any interest in trusts. You also need to find out if the deceased had a shared interest in property as this will also count towards the value of their estate.
How long do I have to carry out my duties as executor?
If the estate owes Inheritance Tax, you won't get the grant of probate unless you pay some or all of the IHT first. The 'due date' is six months after the date of death.
However it is worth noting that it is possible to pay the inheritance tax liability of certain assets (mostly land and buildings, including the deceased's house, and some shares) in ten equal instalments. These instalments, and any late paid tax, carry interest.
If you cannot release sufficient funds from the estate in time to pay the IHT you may need to arrange a bank loan to meet the tax bill and then repay the loan once probate has been granted.
What is grant of probate and how do you get it?
Grant of probate provides the executor with the authority to deal with the deceased person's estate. Without the Grant of Probate you will not be able to transfer legal title of the assets. Therefore, whilst the executors may commence with advertising a property for sale, they will not be able to complete the sale without the Grant of Probate.
You can apply for Grant of Probate in person, but the process is quite formal and it may be easier to ask a local solicitor to undertake this task on your behalf.
Grant of Probate is not normally required where all assets are held jointly with the beneficiary and pass by survivorship to a joint owner.
Getting duplicate copies of the Grant will make it quicker and easier to sort out the estate as you will need to send a copy to the deceased's bank, building society, pension administrator, investment manager and so on, in order to unfreeze funds.
How do I value the deceased's possessions? What proof must I get?
HMRC looks carefully at valuations so make sure you can justify any figures. Assets worth more than £500 must be valued and this typically means getting professional valuations in writing.
- For furniture and general possessions, speak to a local auctioneer and ask for an itemised assessment.
- For equities, bonds and similar investments, contact the investment manager for valuations at date of death (referred to as quarter up values).
- Property valuations should be carried out by a local surveyor who is a member of the Royal Institute of Chartered Surveyors.
- Get statements for bank accounts which note balances at the date of death and ask the bank for a calculation of the accrued interest.
What about liabilities?
Liabilities outstanding at date of death and funeral expenses can be claimed against the value of the assets, thereby reducing the inheritance tax liability. Add up any unpaid utility bills, credit card accounts, outstanding mortgages and so on, without forgetting local newsagents, carers and similar. If you, as the executor happen to settle any of these before getting Grant of Probate, be sure to get a signed receipt.
I think the deceased gave away some assets (potentially exempt transfers) in the last few years, how can I verify these?
This is another area which the taxman scrutinises. The value of gifts made in the seven years prior to death is liable to IHT and so these must be itemised on the tax return. However, each individual is able to make £3,000 worth of gifts per year plus £250 to any number of individuals, and such gifts fall outside the IHT net. There are also other allowances such as gifts in contemplation of marriage.
Ideally, the deceased or a close family member would keep records of such gifts. In any case, you will need to verify details and so check bank statements and cheque stubs to see what gifts appear to have been made in the last seven years. If the deceased had an accountant or solicitor, then they may have helpful information on gifts during the deceased's lifetime.
What are the other chief pitfalls?
Some estates leave both chargeable gifts (for example those to a son or daughter) and exempt gifts (charities) out of residue. If so, then the particular sum given to these beneficiaries is the amount they should receive net of tax. If this is the case you should consult with a lawyer or accountant.
If you over-distribute the estate and further liabilities, beneficiaries or even Wills come to light later on, you could be personally accountable. You may therefore wish to advertise the death to protect against unknown claims. It is also possible to take out insurance or ask beneficiaries to sign a simple indemnity which may provide you with some additional protection.
Other points to consider
Beneficiaries may decide to vary or disclaim their entitlement under the Will which can, provided certain conditions are met, be treated for inheritance purposes as if made by the deceased. This enables a degree of post-death estate and inheritance planning, such as: ensuring potential beneficiaries are properly catered for, having legacies leap-frog a generation and triggering the reduced IHT rate by increasing the amount going to charity. Proper advice should be taken by those involved.
It is also worth obtaining inheritance tax clearance from HMRC before commencing with the distribution of the estate.
Finally, it is good practice for the executors to prepare a statement showing the assets of the estate, less liabilities and how the balance has been distributed.
There are a number of complicated areas beyond the scope of this Briefing Note including intestacy, overseas assets which are subject to the IHT rules of the relevant country, shared interest in property, the presence of trusts, a lack of cash to pay the taxman - not to mention family rivalries. In such cases, professional advice may be necessary. HMRC has issued a Toolkit giving advice on completion of the form IHT400. (See http://www.hmrc.gov.uk/agents/toolkits/iht.pdf )
Another useful site is: http://www.hmrc.gov.uk/trusts/tax-when-someone-dies.htm
We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice.
You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.