The Probate process may seem straightforward, but that does not mean that it is not without its pitfalls, and it is very easy for things to go wrong. In this blog we do not intend to talk about claims against estates or disagreements between beneficiaries and executors, instead we will focus on other things that can go wrong when you are acting as the executor of an estate.
One part of the process where people get things wrong is the inheritance tax form. The rules regarding inheritance tax are detailed, and it is easy to miss assets or to think that something does not need to be included when it should be.
"It is a common misconception that if an account is
held in the joint name of the deceased and someone else,
that it does not need to be included in calculating
the value of the estate"
As indicated in our blog 'How do I establish the value of a deceased's estate', to work out whether inheritance tax is payable, and how much tax is payable, you need to know the value of the estate. It is a common misconception that if an account is held in the joint name of the deceased and someone else, that it does not need to be included in calculating the value of the estate however this is not the case. The value of the deceased’s share must be included in the inheritance tax form, this may be a 50% share or could be more. For example, if the deceased added a person onto their account so that that person could assist them with managing the money in the account but the joint account holder did not contribute the to balance in the account then the full balance will need to be included in the inheritance tax form.
"the fact that an asset is not in the deceased’s name
does not mean that it shouldn’t be included
in the inheritance tax form"
The assets included in the estate for inheritance tax purposes are also not limited just to assets owned by the deceased when they died, it could also include a trust they were the beneficiary of or gifts they have made during their lifetime. Likewise, the fact that an asset is not in the deceased’s name does not mean that it shouldn’t be included in the inheritance tax form. Some people give their children a sum of money to hold to enable them to pay the cost of their funeral. Although this sum may be held in the name of the children, this money still belongs to the deceased and needs to be included when the estate is being valued.
It is also important that the assets the deceased owned or had an interest in is valued correctly. This is not a problem with assets such as bank accounts and most investments which have a set value but could be an issue with properties, land, and some shares which have a value based on what someone is willing to pay for it. For these assets it is often worth asking a professional to provide you with a formal valuation. There is no guarantee that the valuation will be accepted by the Inland Revenue and a profession valuer may be able to assist you in negotiating with the Inland Revenue if they suggest the asset is valued at a higher figure than the valuer you have asked to value it.
You do not want to overvalue the asset as this may mean that more inheritance tax is payable. Likewise, you do not want to undervalue an asset as this could lead to other tax such as capital gains tax being due in the future when the asset is sold. Executors have a duty to report the value of the estate as accurately as possible to the Inland Revenue. If they incorrectly report the value of the estate, they can be personally liable for the penalties payable as a result.
A solicitor will explore with you the deceased’s finances and will be able to advise you which assets need to be included and what information Inland Revenue will need about those assets. A solicitor will also advise you of how best to value each type of asset and will calculate the tax due.
Even when a full asset search is carried out there is always the possibility that a further asset may come to light at a later date. A solicitor will be able to advise you how to deal with this and any resulting additional inheritance tax which may be due.
"In some cases, this can mean that no tax is
due or the tax due is a lot less than you thought"
There are allowances which can be set against the value of the estate to reduce the inheritance tax due. Some of these are available to all estates and others are only available if an estate complies with the requirements of that particular allowance. A solicitor will be able to advise you which allowances are available to the estate you are dealing with and whether the estate complies with any relevant requirements. In some cases, this can mean that no tax is due or the tax due is a lot less than you thought.
Some of the allowances can only be claimed in the two years after a person dies. If the application for these allowances is not made within this period it is not possible to apply out of time. This could lead to tax being due where it could have been avoided if the application was made in time. The executors could become personally liable where these time limits are missed.
"If the estate receives income after the deceased died and before
the estate is distributed then income tax may be due"
Tax for estates is not limited to inheritance tax. If the estate receives income after the deceased died and before the estate is distributed then income tax may be due. Likewise, if an asset is sold for more than the value on the inheritance tax paperwork then capital gains tax may be due. A solicitor will be able to advise you whether income tax or capital gains tax is due. In some cases, the solicitor will be able to assist you with reporting and paying the tax due. Alternatively, they may recommend the use of an accountant.
In some cases, inheritance tax may be overpaid. This may be because an asset is incorrectly valued or because of a drop in the market after the date of death. In certain circumstances, it may be possible to reclaim some of the inheritance tax paid. This is a complex area where estates need to comply with certain requirements for a refund to be due. A solicitor can advise you as to whether a refund is due and can assist you to prepare and submit the required paperwork to claim the repayment.
Where an executor is not aware of the possibility to reclaim overpaid tax the beneficiaries may lose out on a larger inheritance. There are often timescales to comply with and if the executor does not make a claim in time, they can become personally liable for the loss to the beneficiaries.
"You as the executor remain personally liable"
If you distribute the estate and all the tax due has not been paid. You as the executor remain personally liable. This was confirmed by the Courts in the case of Harris v HMRC in 2018. In this case, the value of the estate was just over £1 million with inheritance tax of just under £350,000 being due. The executor sold all of the assets of the estate. So far so good. Where the executor went wrong was in respect of paying liabilities. Instead of paying the liabilities, the executor gave all of the money he received to the sole beneficiary of the estate on the basis the beneficiary would pay all of the liabilities including the inheritance tax. Unfortunately for the executor, the beneficiary didn’t pay any of the liabilities and instead left the UK and moved to Barbados. Needless to say, the Inland Revenue wanted the executor to pay the just short of £350,000 inheritance tax due. The matter went to Court and it was decided that it was no defence that the money had been given to the beneficiary on the basis he would pay the tax charge and the executor was held to still be personally liable to pay nearly £350,000 of inheritance tax.
If the executor had asked a solicitor for advice, the solicitor would have guided him through the options and how best to protect himself from any personal liability.
Part of dealing with an estate is ensuring that all of the debts are paid but what if debts are unknown. Executors are often reliant on the paperwork they can find or their own knowledge to know what the deceased owned and what they owed in terms of liabilities. If an executor distributes the estate and a debt comes to light after the distribution, the executor is personally liable to pay that debt. The executor would then need to request that the beneficiaries repay the executor. There is no guarantee that the beneficiaries will pay the executor or will be able to pay the executor.
If an executor distributes the estate and a debt comes to light after
the distribution, the executor is personally liable to pay that debt.
There are ways to reduce this risk, such as placing a statutory notice. A solicitor can guide you through the options and how these will protect you as the executor from having to personally repay any debts.
Although we are not discussing claims against estates in this blog, they do need to be considered when deciding when to distribute the estate. One type of claim which could be made against an estate is a claim under the Inheritance (Provision for Family and Dependants) Act. Someone making this type of claim has six months from the date of the Grant of Probate/Letters of Administration to issue a claim at Court. They then have a further four months to notify the executors that a claim has been made.
"A solicitor can advise you as to the options available
to reduce the risk to you as an executor"
If an executor distributes an estate before six or ten months have passed since the Grant of Probate/Letters of Administration was issued they may be personally liable to pay any successful claim against the estate. Again, the executors can seek to reclaim any amount they pay out from the beneficiaries but there is no guarantee that the beneficiaries will have the funds to pay this particularly if they have already spent their inheritance or will be willing to pay. A solicitor can advise you as to the options available to reduce the risk to you as an executor.
As an executor, it is also important to confirm who are the beneficiaries of the estate are. Although this may sound obvious this is not always the case. If the Will leaves the estate to the children of the person who has died without naming them, do you know for certain that the deceased did not have children from a previous relationship? As the executor, if you distribute and it later transpires the deceased did have another child who you did not know about then you will be personally liable to pay that beneficiary their share of the estate. You would then need to ask the other beneficiaries to reimburse you if they are willing and able to.
"Acting as an executor can lead to you
becoming personally liable
in a number of different ways"
Acting as an executor can lead to you becoming personally liable in a number of different ways. A solicitor can guide you through the options available to reduce the risk to you and to ensure that the correct beneficiaries receive the right inheritance from the estate. If you are the executor to an estate and wish to avoid the pitfalls then seeking the assistance of a solicitor can be of great help.
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About Francesca Thomas
Francesca joined Thornton Jones Solicitors in August 2020 and has worked across various departments as part of her training contract. Having qualified as a solicitor in February 2023, she has now joined our Private Client Team.
In 2018, Francesca completed her history degree and then went on to complete the Law Conversion Course and Legal Practice Course and then trained with us. Francesca gained a lot of experience in the Private Client team during her training contract and worked alongside the Team with a variety of cases. She is now looking forward to building on that knowledge and expertise.
Outside of work, Francesca enjoys cooking and socialising with her friends. She also enjoys travelling and will often be jetting off at the first opportunity!
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