Estate Administration — Reporting Requirements to HMRC

Acting as a personal representative is not for the faint hearted and does carry with it an element of personal risk. A personal representative is responsible for administering a deceased person’s estate. Part of their role will normally include reporting the value of all  estate assets and liabilities to HMRC and obtaining a grant of representation to allow them to sell, transfer or call in the estate assets. Personal representatives will be known as ‘executors’ if they are appointed through the deceased’s will, or ‘administrators’ if the deceased died without a will and they are appointed through the intestacy rules.

What is grant of representation

A grant of representation is nearly always required to deal with the administration of an estate. The grant is the court document which provides the legal authority of the personal representatives to deal with the deceased’s assets. It is always required to   transfer or sell a property in the sole name of a deceased, and is often requested by financial institutions to deal with a deceased’s investments, sell or transfer shares and/or to close bank accounts.

Depending on the value of the estate, inheritance tax may need to be paid. The tax bill, or a portion of it, must be paid before an application for grant of representation can be made. This can often be problematic, as a property and some investments cannot be sold until the grant is issued. For estates which are asset rich but cash poor, this may lead the personal representatives to opt to pay the inheritance tax in instalments (if the estate includes property or certain private company shares) or to take out a short-term loan to pay the tax until the estate assets have been sold.

Valuations

The personal representatives are responsible for valuing the estate of the person who has died. This includes property, personal possessions, house contents, cars, investments, and cash assets. This will also include any business interests, and assets which are owned jointly.

If inheritance tax (IHT) is payable, HMRC will require a professional valuation of any property or land, business interests, and any personal possessions worth more than £500.

Gifts

The personal representatives must also provide details of all gifts the deceased made in the seven years prior to their death. If the deceased did not keep records of these gifts, the personal representatives should review the previous 7 years’ worth of bank statements and make reasonable enquiries to determine if any such gifts were made. There are some exemptions to gifts which can exempt them from IHT or reduce the amount chargeable to IHT. Any such  exemptions must be claimed on the HMRC account.

Tax

IHT is due at the end of the sixth month after a person’s death. If there is still IHT to pay following the end of that 6 months, interest will be also charged on the outstanding tax. The Interest rate varies but  is not insignificant, and so the interest can quickly accrue to a large sum.

If the tax report is not submitted within 12 months, HMRC may also charge late account penalties. It is therefore important following a person’s death that the executors act promptly to avoid interest & penalty payments.

Depending on the deceased’s date of death and the value of the estate, HMRC has different reporting requirements for personal representatives to comply with when making the probate application.

As well as inheritance tax, the personal representatives are also required to report to HMRC the income tax position in the tax year that the person died and the income received during the estate administration. This includes bank account interest, interest on investments and potentially rental income. Depending on the value and complexity of the estate, HMRC may accept an informal report or they may require the estate to be registered for a self-assessment tax return.

The estate may also be liable for capital gains tax (CGT) if the value of property or investments has increased since the date of death. The personal representatives will need to report any CGT liability to HMRC and pay any tax due.

Tax Residence for IHT

Identifying whether the deceased was considered a ‘Long Term Resident’ in England and Wales the date of their death is critical as it will confirm the tax regime applicable to the deceased’s estate.

Intestacy

The intestacy rules set out who is entitled to administer and inherit from a deceased’s estate where there is no Will. It is not automatic that a deceased’s spouse will inherit the whole of the estate and there is no provision for cohabitees to benefit from a deceased partner’s estate on their death.

Assets outside the UK

If the deceased owned property and assets outside the UK, it will be necessary to ascertain whether they left a Will in that country. It will also be necessary to identify the relevant law which applies to the distribution of those assets.

Business assets

If the deceased had an interest in a business, input will undoubtedly be required to assist with the mechanics of transferring that interest to the intended beneficiaries. It is also possible that inheritance tax reliefs may be available to offset against the value of business assets as part of the application to HMRC.

Trusts

If the deceased’s Will includes one or more Will trusts, additional steps will need to be undertaken by the executor/s (who may also be the trustee) to set up the trust. There will then be ongoing administration of the trusts, and depending on the nature of the property held, it is almost certain that the executor/trustee will need to instruct a solicitor and an accountant to prepare tax returns and trust accounts.

Minor beneficiaries

If minor beneficiaries are entitled under the terms of a deceased’s Will  or intestacy, additional steps will need to be undertaken by the personal representatives in relation to that child’s entitlement. It is not always possible or sensible for executors to discharge a legacy to a minor child by obtaining receipt from that child’s parents or legal guardian.

Estate liabilities and creditors

Personal representatives can be held personally liable if they distribute an estate prior to paying any estate liabilities which later come to light. Even unknown creditors can seek recovery of debts of a deceased from their personal representatives.

Validity of the Will

It is possible for third parties to challenge the formal validity of a Will, most commonly where there are allegations that the deceased lacked the necessary testamentary capacity when their Will was executed, or there may be allegations of undue influence. If there is any suggestion of the Will being challenged, the executors should consult a solicitor as soon as possible.

Claims against the estate

There are certain categories of people who will automatically qualify to bring a claim under the Inheritance Provision for Family and Dependents Act 1975. Defending such claims can be costly and time consuming and personal representatives need to be fully appraised of their duties and obligations in such circumstances where this is a relevant consideration.

The role of a personal representative is complex and onerous and the responsibility of acting in this capacity should be taken seriously. Getting it wrong could be costly for you personally even if you are not a beneficiary of the estate.

Summary

Weightmans' Private Wealth Team can assist personal representatives in ascertaining whether inheritance tax is payable, dealing with the reporting to HMRC, obtaining the grant of representation and dealing with the distribution of the assets. If an estate is subject to inheritance tax, it is important to obtain specialist advice to ensure the assets are properly declared to HMRC and that all the relevant tax exemptions and reliefs are claimed, to reduce the inheritance tax payable.

If the will creates a trust, the personal representatives have additional duties if they are also the trustees. Read more on trustees' duties and obligations.