administration of estatesa guide

IntroductionThis booklet has been prepared to explain what happens when an estate is administered, particularly for those who are Executors or Administrators.

The procedure can be broken down into stages. Not every stage will apply to every estate and the stages may overlap. The timings given are very approximate and may be considerably greater in the case of large or complex estates or where there is a dispute between any of the parties.

Where there is a Will There may be one or more Executors. Some or all of them may be partners in this firm. Any partner who is an Executor will have an additional duty of care and responsibility to ensure that the administration proceeds smoothly.

If there is no Will The technical word for this is “intestacy”. By law the closest members of the family are the persons entitled to apply to administer the estate and to share in that estate. The Probate Registry grants the right to do this by a document called “Letters of Administration”. An Act of Parliament sets out the person(s) who have the right to take out the letters of administration and to share in the estate.

The remainder of this document briefly sets out the various stages of the administration process and a more detailed outline of what work is entailed.

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Before we start, a few technical terms

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• HMRC Trusts and Estates is the department of HM Revenue and Customs which deals with Inheritance Tax.

• A Deed of Variation (also known as a Deed of Family Arrangement) is an agreement between the beneficiaries varying the terms of the Will. It has to be executed within two years of the death. It can also be used where there is an intestacy.

• The District Valuer is a representative of HMRC who is responsible for checking or agreeing the value of any land which is included in an estate.

• The Executor/Executrix is the man or woman named by the Will to carry out the administration of the estate (Administrator/Administratrix if there is no Will).

• The Oath is a formal written document sworn by the Executor, giving details of the person who has died and the value of their estate. This confirms that the Will is indeed the testator’s last Will, and that they undertake to be responsible to the Court for the proper administration of the deceased’s estate. An Oath also has to be sworn where there is an intestacy.

• The Grant of Probate is the document carrying the Court seal by which the Court recognises that the Will is valid and confirms the appointment of the Executors.

• Letters of Administration means the document carrying the Court seal which appoints the Administrators in the case of an Intestacy.

• The Testator/Testatrix means the man or woman who made the Will.

• Inheritance Tax is the tax payable on the estate of the deceased.

• The Nil Rate Band is the first £325,000 of the deceased’s estate which is charged to Inheritance Tax at 0%, subject to any reliefs or exemptions (for example where the deceased’s estate passes to a spouse/civil partner or charity). The balance over the threshold is subject to Inheritance Tax at 40%.

• The Inheritance Tax Account is a special tax return to HMRC listing all the assets and liabilities of the deceased for the purpose of calculating Inheritance Tax.

• The Corrective Account follows up the Inheritance Tax Account when additional assets or debts of the estate are discovered or when values originally submitted have to be modified.

• The Clearance Certificate is an official certificate issued by HMRC confirming that there is no further Inheritance Tax due.

• The Probate Registry is the official department of the Court which is responsible for issuing grants of probate and letters of administration. Although we refer to “the Court” there is usually no hearing and the process of getting these grants is nearly always just an administrative procedure, although, sometimes a complicated one.

• The Shares Valuation Division is a department of HMRC which is responsible for checking or agreeing the value of private company shares which are included in an estate.

• Statutory Advertisements are formal advertisements which are placed in the London Gazette and certain newspapers advertising for creditors of the estate in order to protect the Executors from later claims.

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Note: For all practical purposes the Administrator, once appointed, has the same powers as an Executor. Subsequent references to ‘Executor’ or ‘Grant of Probate’ will include ‘Administrator’ and ‘Letters of Administration’.

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Stages of administration – outlineStage 1: Obtaining the Grant of Probate This is essentially an information gathering exercise so that we can prepare the Inheritance Tax Account and the Executors’ Oath. This stage is triggered by the death of the testator so the overall picture of the estate may not yet be clear. Nevertheless, important decisions may have to be taken - for example how any Inheritance Tax is to be paid, whether the beneficiaries need to enter into a Deed of Variation, how to preserve the assets and how to deal with any pressing liabilities other than tax. In addition the statutory advertisements can be placed.

Stage 2: After probate is granted This is a busy period during which the Grant of Probate is registered with all the asset holders, debts are paid and assets may be collected in or sold. There are usually queries from HMRC about the value of the estate. If the assets are clearly sufficient, the Executors will authorise the payment of legacies, and if possible a payment on account (often referred to as an ‘Interim Distribution’) is made to each of the beneficiaries. One or more of the beneficiaries may consider redirecting their entitlements under the Will (or the effect of the Intestacy Rules) by means of a Deed of Variation.

Stage 3: Review This may be the most protracted part of the administration. There may be lengthy negotiations with HMRC over the valuation of assets in the estate and the calculation of Inheritance Tax. If the beneficiaries have decided to enter into a Deed of Variation this is prepared at this stage.

Problems may arise such as difficulty in selling an asset or tracing a beneficiary or the testator’s pre-death income tax affairs may be outstanding. All of these outstanding matters must be completed before Stage 4 is reached.

Stage 4: Accounting and final distribution The value of all the assets and debts has finally been settled with HMRC. Inheritance Tax has been paid and an application for a Clearance Certificate has been made. Accounts can now be drawn up to show money received and paid by the Executors and what funds are due to the beneficiaries. We make final payments and generally tie up all loose ends to complete the administration.

Continuing Trusts? It is often the case that a Will leaves property on continuing trusts, for example the income is left to the surviving spouse for life and then the capital is distributable between the children.

The Will usually specifies that the Executors are also to act as Trustees of these continuing trusts. At the conclusion of the initial administration stages, the Executors automatically switch to their role as Trustees. The relevant assets are transferred into their names to be held as a Trust Fund and they are then responsible for carrying out the terms of the Trust.

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The stages – in more detailGrant of Probate The testator’s Will names a certain person or people as “Executors”. The Executors are the people who are legally responsible for dealing with all of the deceased’s property. They become legally responsible from the moment of death.

Renouncing Executorships Executorship is a serious responsibility, but it is not compulsory. Anyone who does not wish to act as an Executor, for any reason, may ‘renounce’ his Executorship. Renunciation is final and cannot be retracted once made. An Executor who wants to renounce must not start dealing with any property of the estate.

Non-proving Executors Alternatively one or more of the Executors may choose to become “non-proving” Executors. They remain Executors but do not take part in the application for the Grant of Probate.

For example, this frequently happens where one of the Executors is living abroad, or if there are three or four Executors and it is felt that it would be unnecessarily expensive and time consuming to circulate documents and forms to all of the Executors for signature. If ‘non-proving’, they are not named as Executors in the Grant of Probate and do not sign any documents. However, if at a later date they decide it is necessary they may then apply to the Court to be included as one of the “proving” Executors.

Obtaining Grant of Probate The purpose of obtaining a Grant of Probate is to confirm the Will officially and to confirm the Executors named in the Will so that they can administer the assets of the estate. The Will is deposited at the Probate Registry with an Oath sworn by the Executors in which they set out the facts of the deceased and that they are the Executors named in the Will. The Registry scrutinises the Will and the Oath. If it is satisfied, then the Will is filed at the Registry and a Grant of Probate is issued to the Executors. This is the official document confirming the appointment of the Executors.

The Executors will not be able to deal with most of the testator’s property until the Grant of Probate is issued. Shares, a house or flat and monies held in a bank, building society or similar institution are all ‘frozen’ until probate is granted. The Executors or their agents can obtain information about these assets but cannot deal with them until they can show a copy of the Grant of Probate.

What can be done before Grant of Probate? But a few items can be dealt with before the Grant of Probate is obtained:

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Most Joint Property For example, a joint bank account. When one of the joint owners has died all that is usually necessary is for the survivor to produce a copy of the death certificate and the property is then automatically transferred into the survivor’s sole name. There are certain exceptions to this and we can advise you on these.

Small Accounts Sometimes if there is not much money in an account, or if an asset has a low value, we may be able to cash it in without obtaining a Grant of Probate.

Certain Insurance Policies These may be cashed in without obtaining a Grant of Probate. This will depend upon the terms of the policy and we can advise you on this. Even if it can be cashed in immediately, a copy of the policy must be kept as HMRC will wish to see it.

Personal Effects It is often advisable to deal with personal effects before a Grant of Probate is issued. For example, the Executors may want to remove valuable items to safe custody. Such items may not have insurance cover if they are left in an empty house. The Executors have the right to do so; they are responsible for the property and it is their duty to take any steps they may consider necessary to safeguard it. Until the Grant is issued the Executors’ appointment has not been officially confirmed. Thus if an Executor does deal with any items he should make sure that he retains control of them until Probate is granted.

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Procedure for obtaining the Grant of ProbatePreliminary meeting The first step of the administration is for the Executors to collect together all the deceased’s papers. We recommend that we have a preliminary meeting with you so you can hand over the papers. At the meeting we will advise on what has to be done and explain how we will deal with the estate. We can answer your questions and discuss and advise if there are any aspects of the administration which you wish to carry out yourselves.

Normally we write to the asset holders such as banks or building societies and to debtors. The Executors themselves usually deal with valuing the personal effects and any house or flat. If the Executors want to write some of the preliminary letters themselves then we can advise on the particular details that have to be obtained.

Inheritance Tax account Before the Probate Registry will issue a Grant of Probate the Executors must submit an Inheritance Tax Account to HMRC and pay any Inheritance Tax. This Account must list all the known assets and debts and their value at the date of death. Precise values should be included.

Estimates should only be used where a precise value is difficult to obtain (for example, the value of a house or the amount of arrears of income tax). These estimates must be honest and reasonable. HMRC can impose a penalty if they consider that the Executors have deliberately put in an unrealistically low estimate. Details of all known assets must be given to HMRC in the Account.

Corrections to the estimated values and any additional assets or debts will be reported later in the Corrective Account. Interest accrues on any unpaid Inheritance Tax six months after the month in which the death occurred. For example, if an individual dies on 15 February, interest accrues on Inheritance Tax from 1st September. Therefore, the Executors should aim to file their Inheritance Tax Account within six months to minimise or avoid interest charges.

Advertising for creditors This is a standard legal procedure by which the Executors are protected against unexpected claims arising at a later date. There is a two month notice period and until this has expired no money or property should be distributed to beneficiaries.

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Inheritance Tax Inheritance Tax on all of the cash assets, such as quoted shares, personal effects and bank accounts, must be paid when applying for the Grant of Probate. If the estate is liable to tax then the Executors will have to consider how to raise the money. The testator’s assets will still be “frozen” at this stage so the testator’s own money cannot be used to pay the tax. This means that the Executors may have to borrow funds (such as a bank loan) to be repaid from the assets when probate has been granted. Banks and Building Societies may permit withdrawals, sometimes in return for an undertaking to use this to pay tax only or they may be prepared to transfer sums directly to HMRC on the Executors’ written instructions. Generally, gifts and legacies to a surviving spouse or a charity are wholly exempt from Inheritance Tax. Certain types of property may be wholly or partially exempt if business or agricultural relief applies and we can advise on this.

To calculate the Inheritance Tax liability and complete the Inheritance Tax Account, we may need information about a spouse (or civil partner) who predeceased the testator. This is because the deceased’s late spouse (or civil partner) may not have used their nil rate band. This means any unused nil rate band can be carried forward and added to the testator’s own nil rate band which can reduce the overall Inheritance Tax liability. If the testator has been married (or in a civil partnership) more than once then we will require this information for each of their spouses (or civil partners) who predeceased them because this could also reduce the Inheritance Tax liability.

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Principles of valuationPersonal Effects/Chattels If the value is likely to be considerable and if Inheritance Tax is payable, then a professional valuation should be obtained. It is not compulsory but may save time and expense in dealing with later queries by HMRC.

Although HMRC have no power to compel the employment of a professional valuer, it is not sufficient merely to estimate a round sum. The value should be estimated in some detail and individual chattels of a value of £100 or more should be separately shown with detailed particulars given of pictures and other chattels of special value. The price of a motor car should be obtained from one of the specialist magazines.

House/Flat If the house is to be sold then a formal valuation is not necessary. HMRC will generally treat the sale price, if it is sold within a year of the death, as its probate value.

If the property is not to be sold, but there is no Inheritance Tax to pay, then again no formal valuation is necessary. A reasonable estimate of its value is all that is required.

If there is Inheritance Tax to pay and the property is not going to be sold immediately a formal valuation will probably be needed. We can advise you on this.

Executors’ Bank Accounts If tax is payable or if the estate is large with a number of beneficiaries then the Executors may consider opening an Executors’ bank account. If the estate is small or straightforward, or if there are only one or two beneficiaries, then an Executors’ account may be unnecessary.

Sale of the House Although probate has not been granted, the testator’s house may be put on the market. The preliminary conveyancing steps may be taken, and contracts exchanged. However, the sale cannot be completed until the Grant of Probate has been issued.

Applying for the Grant of Probate Based on the information supplied by the Executors, or which we have obtained, we calculate the tax and Court fees to be paid and prepare the Inheritance Tax Account and Executors’ oath. The Executors have to sign these. The oath has to be sworn (or affirmed) in front of an independent solicitor.

Once the papers are signed we submit the Account to HMRC and pay any Inheritance Tax due at that time. Once HMRC have confirmed that they are happy for the Executors to apply for the Grant of Probate, which usually takes about two weeks, the Oath and the Will are then lodged at the Probate Registry.

The Grant of Probate is usually issued within two or three weeks of the papers being lodged.

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After Probate is grantedThe Grant of Probate sealed by the Court confirms the appointment of the Executors. They may now deal with all the assets in the deceased’s sole name that have until now been frozen. The official copies of the grant need to be circulated to banks, building societies and any other institution which holds assets for the deceased. The Grant of Probate is authority for the assets to be sold or cashed.

Money gathered in is used to repay any Inheritance Tax loan and to pay off debts of the deceased. Any surplus money is used to pay expenses which have arisen since the death.

The Executors must now decide how to deal with the remaining money and other assets. When the two months notice has expired, the Executors may consider paying any cash legacies and making a payment on account to the residuary beneficiaries. It is important, however, to set aside sufficient money or assets as a reserve to pay for all future expenses and any further tax. As part of our service, we calculate the figures and advise on what amount the Executors may safely distribute at this stage.

In addition, the Executors must consider whether it is possible that any claim may be made against the estate under the Inheritance (Provision for Family and Dependants) Act 1975. This Act enables certain classes of family members and dependants to claim against

the estate on the basis that the Will (or the rules of intestacy if there is no Will) has not made “reasonable financial provision” for them. In general any such claim must be issued at court within six months of the Grant of Probate being obtained. The Executors should therefore consider whether they wish to delay any distributions until the six month period has expired.

Assets may be cashed and the proceeds paid to beneficiaries or the assets (particularly shares or personal effects) may be transferred straight to the beneficiaries. There are various tax implications when doing this.

In the meantime HMRC will have been checking the Inheritance Tax Account in detail and will now be ready to raise queries about values or calculations of tax. Where shares in a private company are involved there may be lengthy and detailed queries to answer from the Shares Valuation Division. As the administration proceeds, any values which were estimated values are replaced by corrected figures and a Corrective Account should be prepared with details of all of the corrections. Finally, when all values have been agreed an application should be submitted to HMRC for a clearance certificate, which confirms that all tax due has been paid.

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The estate is liable to basic rate income tax on income which it receives during the administration. Each beneficiary must include his share of that income in his personal tax returns. The estate tax returns are usually prepared by accountants.

When an administration is lengthy, interim Estate Accounts can be prepared by accountants at a suitable stage. This enables the Executors to see what has been paid and what money and property is still held. On conclusion of the administration the accountants prepare the final Estate Accounts. All money received is accounted for in the Estate Aaccounts. The administration has now come to an end.

Deed of Variation/Family Arrangement It is possible to redirect one or more of the gifts contained in the Will, even though the testator has died, provided that the beneficiaries concerned are all of age and have capacity. This can be very useful if, say, family circumstances have changed since the Will was made or if a beneficiary wishes some or all of his share of the estate to go to someone else without incurring any Inheritance or Capital Gains Tax liability. It is also possible to alter the statutory shares inherited by a family under an intestacy.

There are important tax implications and tax-saving possibilities in a Deed of Variation. It is possible to have more than one Deed of Variation for an estate provided that each deals with different assets.

To save tax, such a Deed must be executed within two years of the death, and in certain circumstances HMRC must be notified with a copy of the Deed.

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Further guidance The following notes are by way of guidance as to the information to be supplied:

• Do not include items which did not belong to the deceased.

• The basis of valuation is to estimate the price which personal effects would fetch if sold on the open market at the date of death. An up-to-date insurance valuation would, as a rule, indicate figures which are too high, since those values are based upon full replacement cost. Although antiques and special items tend to increase in value considerably after a few years, modern mass-produced furniture has a low secondhand value and fitted carpets and curtains are worth very little unless they are going to be sold with the house

• Clothing may be assumed to be of no value with the possible exception of furs and clothes which might be of interest to specialists shops, for example antique evening dresses

• Where items are sold after the death HMRC will treat the gross sale price as the probate value (ie taxable value). Expenses of the sale such as auctioneers fees are not deductible for tax purposes.

Conclusion This booklet is intended to provide general guidance as to what is usually involved in an administration and to explain some of the procedures.

However, every case is different and every client will have individual requirements. Our private client team are specialists in this area, handling hundreds of probate cases, from the very simple and straightforward through to the complex. We also have a disputes team who can advise should the estate need this specialist advice.

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Liz PalmerPartner: Head of private clientT: +44 (0)20 3755 5645E: liz.palmer@howardkennedy.com

Private Client team

Michael LewisPartnerT: +44 (0)20 3755 5572E: michael.lewis@howardkennedy.com

Robert CraigPartnerT: +44 (0)20 7344 5421E: robert.craig@howardkennedy.com

Simon MalkielPartnerT: +44 (0)20 3755 5587E: simon.malkiel@howardkennedy.com

John AnnettsPartnerT: +44 (0)20 3755 5362E: john.annetts@howardkennedy.com

Emily MailerPartnerT: +44 (0)20 3755 5584E: emily.mailer@howardkennedy.com

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Services for individuals include:

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Nick MendozaSolicitorT: +44 (0)20 3755 5603E: nick.mendoza@howardkennedy.com

James LewisSolicitorT: +44 (0)20 3755 5570E: james.lewis@howardkennedy.com

Sian WilliamsSolicitorT: +44 (0)20 3755 5800E: sian.williams@howardkennedy.com

Sam LinnenSolicitorT: +44 (0) 20 3755 5575E: samantha.linnen@howardkennedy.com

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