UK: Coping With IHT – Advice To Individuals And Executors

Advice to individuals

Benjamin Franklin is famous for his quote: "In this world nothing can be said to be certain, except death and taxes" and both these coincide when it comes to the IHT return that has to be filed following an individual's death. This is not something that people care to dwell on, but as always planning ahead can help to make things easier for those left behind to pick up the pieces.

The best advice for individuals is to be organised during lifetime – it's too late to pass on verbal instructions after you have 'passed on'!

Make a Will and keep it up to date. The future well-being of your family may depend on it. At the very least, review your Will if you have additional children, grandchildren, get married¹ or divorced. Without a Will everything will pass to surviving relatives (or, in certain circumstances, the Crown) according to fixed rules.

Even if the fixed rules would distribute your estate as desired, dying without a Will (intestate) still creates problems and delays for those left behind. Note these rules, governing how estates are distributed if there is no valid will, changed with effect from 1 October 2014.

Although not legally binding, you can prepare a letter of wishes to give guidance to your executors, particularly if you appoint professional executors or non-family members to administer your will. The letter of wishes can indicate how you would like your estate distributed, if it is not specified in the Will and why you have taken those decisions. This may avoid disputes at a later date.

Keep a copy of the Will in a safe place along with copies of important documents like life insurance and pension policies, shares and other investments. Appoint executors that you trust to administer the estate properly and let them know where your important papers are kept.

Consideration might also be given to keeping an up to date list of passwords to access computer files and website storage areas etc with details to let your executors know how to access the list.

HMRC has plenty of helpful advice on its website about planning for inheritance tax (IHT) during one's lifetime.

www.hmrc.gov.uk/inheritancetax/pass-money-property/intro-iht-plannning.htm

HMRC also lists the various types of lifetime gifts that are exempt from IHT.

www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm

However some of these reliefs involve making gifts well before death and so require action to be taken long before taxpayers reach retirement and start to contemplate their mortality. This means that individuals need to start thinking about IHT sooner rather than later.

A potentially exempt transfer can include cash, property or any other asset. There is no upper limit on the value and it can go to friends or family. You must survive for seven years after making the gift for it to be exempt for IHT purposes, although in the event of death occurring after three years any IHT liability arising on the earlier gift may be tapered. However you cannot retain any benefit in whatever is being given away, for example, you cannot hang a painting in your own home if it has been registered in your child's name. Also, capital gains tax may be charged on gifts other than cash.

Regular gifts from income can be made for an unlimited amount, as long as it can be proven that gifts are made regularly, for example, to pay school fees, and they are made from surplus income. You do not have to live for seven years after making regular gifts in order for them to be exempt from IHT and there is no limit to the amount qualifying for exemption.

Maintaining a record of lifetime gifts will save executors having to re-construct the information when you are no longer alive to answer any queries. Setting the details and information as per the HMRC form IHT 403 would be the ideal way of doing this.

www.hmrc.gov.uk/inheritancetax/iht403.pdf

Advice to executors of an estate

The recent crackdown on tax evasion and avoidance means the tax authorities are almost certain to be taking a closer look at the payment of inheritance tax. Typically, the estates of around 16,000 people are liable to IHT 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.

If a family member finds that they have been appointed as executor of the estate of a deceased person they should consider taking professional advice. Even if the estate looks straightforward at first glance it will always be best to obtain independent professional valuations for residential and commercial property, unquoted shares and the more esoteric investments like jewellery, antiques, classic cars.

What are the 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 full IHT return (IHT400) to HMRC.

Usually where no IHT is due, the estate is referred to as an 'excepted estate' and a simpler IHT205 can be submitted to HMRC. Depending on what is in the estate and the amount of past gifts, a full IHT return may still be required even where there is no IHT liability.

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. Bear in mind that 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.

Payment of IHT

If the estate owes IHT, 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 IHT liability on 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 certified 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. HMRC recommends that professional valuations should be obtained unless the asset is worth less than £500 or publicly available data can be used to support the valuation.

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 IHT 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?

The value of gifts made in the seven years prior to death is liable to IHT and so these must be itemised on the IHT 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 have kept 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.

The beneficiaries of the Will all believe that it would benefit the beneficiaries to alter the terms of the will, what can I do?

Sometimes a will, drafted some time ago, may not suit the beneficiaries after the individual has died. For example, due to changes in legislation, the Will may not be tax efficient or, perhaps, adult children might prefer for their legacies to be used during the remaining parent's lifetime to support the parent.

As long as beneficiaries all agree, a deed of variation can be signed to alter the terms of the Will such that the varied Will terms are treated as if made by the deceased on the date they died. This variation has to be made within two years of the date of death and professional advice will be required in order to prepare a valid deed and in order to ensure relevant tax elections and tax returns are made.

A revised IHT400 form may need to be submitted if the Will is varied.

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.

It is also worth obtaining IHT 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 article 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 recently issued a Toolkit giving advice on payment of IHT400.

See www.hmrc.gov.uk/agents/toolkits/iht.pdf

Another useful site is shown below:

www.hmrc.gov.uk/trusts/tax-when-someone-dies.htm

Footnote

1. In England and Wales marriage revokes an existing Will but the same does not apply on divorce.

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.