WAE - Administration II

Why would an executor be unable to act?

- pre-deceased the testator or survived the testator but died before taking out the grant

- are a minor

- lack capacity

- are the testator's former spouse and the divorce took place after the will was made (unless the will expressly states otherwise).

What are the executor's 3 choices if they do not wish to act?

- Renunciation

- Reserving power

- Appointing an attorney

What is renunciation?

- formally and permanently giving up right to apply for probate

- administration continues as if they were never appointed

- E must sign form of renunciation, and this will be submitted to the probate registry when the other executors are applying to show why E is not applying

- cannot renounce if one has already intermeddled

- may need to renounce right to apply as an executor AND as an administrator

What is intermeddling?

- taking steps to indicate E has 'accepted their appointment' and are fulfilling the duty to administer the estate

- E cannot renounce if they have intermeddled with the estate

examples:

- Obtaining, receiving or holding the deceased's assets

- paying debts, selling assets

- but mere acts of common humanity eg arranging the funeral and securing assets do not count

How does reserving power work?

- if E does not want to apply for grant of probate immediately, but wants to reserve the power to do so later

- there must be at least one other E who takes out the grant

- E1 can later apply for grant of double probate if the administration is nor yet complete to run alongside original grant

- no formal notice is needed for reservation by E (unlike for renunciation) but E2 and others will need to give notice to E1 that they are applying for probate

- reservation of power will be noted on the original grant

How does appointing an attorney work (BEFORE E has obtained the grant)?

- E is delegating the power to apply for a grant.

- As the attorney is not named in the will as executor they cannot apply for a grant of probate.

- therefore, the other executors would apply for a grant of probate and the attorney would make a parallel application for letters of administration (with will).

- must provide power of attorney to probate registry as part of the application

How does appointing an attorney work (AFTER E has obtained the grant)?

- PR may delegate their functions to an attorney for a maximum of 12 months, to be renewed if needed.

- Notice should be given to the other executors.

- Once appointed the attorney can carry out administrative steps on behalf of the donor.

What will happen if there are no executors willing or able to act?

- a grant of probate cannot be issued.

- a grant of letters of administration (with will) would be appropriate

- an administrator would be appointed

When is an administrator unable to act?

- Pre-deceased the testator or survived the testator but died before taking out the grant (although in some cases their PR may act)

- a minor (unless an application is made on their behalf)

- lack capacity

- no beneficial entitlement to the estate

What can an administrator do if they do not wish to act?

- Renunciation

- Appointing an attorney

cannot reserve power like executors can

What will happen if a PR decides not to act but does not renounce/reserve/appoint an attorney? e.g., does nothing

possible to obtain a court direction (using the citation process) to:

- require a person to take out a grant

- remove their right to apply

- authorise another person to take on the administration

What is form IHT 400?

- inventory of the assets to which deceased was beneficially entitled and of their liabilities.

- plus the exemptions and reliefs that apply

- Calculates the amount of IHT payable.

What is the deadline for submitting Form IHT400?

- within 12 months of the end of the month in which death occurred

What is the deadline for paying inheritance tax?

within 6 months of end of month of death

- after this, interest is required to be paid on unpaid amount

Why should PRs submit form IHT 400 and pay IHT as soon as possible in practice?

- grant of probate will only be issued when form has been submitted and tax has been paid so PRs need this to carry out administration of the estate

- avoids paying interest

How can IHT be paid in installments?

- can be paid in 10 equal installments

- when the PRs submit the IHT400 they only need to pay the instalments that have become due by that date

Paying IHT in instalments is only possible for the IHT on which assets?

- Land and buildings

- Farms or interest in a farming business

- Business or interest in a business

- Timber

- Company shares/securities giving the deceased control

- Some unquoted company shares/securities that did not give control where payment cannot be made without undue hardship or tax on the shares is more than 20% or where value of shares is more than £20,000 and shareholding is more than 10% of value of company's shares

What will happen re IHT if tax is being paid in instalments on a property and the property is then sold?

- instalment option ceases in relation to that property

- outstanding IHT on that property is due immediately and sale proceeds are to be used to meet the debt

What is the golden rule for whether an IHT400 form is needed?

If IHT is being paid, there will always need to be an IHT400 form

if IHT is not being paid, there may still need to be an IHT400 form

When will an IHT400 form be needed when no tax is being paid?

When estate is over 3m and still no tax is being paid - suggests there is some kind of irregularity

What will PRs need to provide if the estate is excepted and no tax is being paid?

- must provide information about the value of the estate as part of the application for the grant of representation.

- Key information is then sent by the Probate Registry to HMRC.

What is a low-value excepted estate?

An estate where there is no IHT payable because the gross value of the estate is below NRB.

- Be sure to include TNRB from spouse as well

- the RNRB is NOT considered and if claimed, the estate cannot be excepted.

What is an exempt excepted estate?

- the gross value of the estate is less than £3 million but above the NRB

- no IHT is payable because after debts are deducted AND spouse/charity exemptions are applied, the net value of the estate is below the NRB

- (debts alone or other exemptions e.g, BPR are not enough, must have spouse or charity exemption)

What exceptions prevent an estate from being excepted? (even if it is low-value or exempt excepted estate)?

- T made a GROB that subsists at death/still using the benefit in the 7 years prior to death

- There can only be 1 trust interest, and it cannot exceed £250k (unless passing to spouse)

- Foreign assets are worth more than £100,000

- Lifetime gifts exceed £250,000

- A claim for the RNRB is being made

What is a claim for loss relief?

- entitles the PRs to claim a partial refund of IHT where losses occur on the sale of certain assets within prescribed time frames (any more detail is beyond scope)

What must PRs do if they realise the date of death on the IHT400 was inaccurate/sum of IHT paid was incorrect?

- send the corrective form C4 to HMRC if they need to make any amendments - signed by executor

- if they need to pay more IHT, should send the money with the form

How can PRs raise money to pay income tax without access to their assets?

- Direct Payment Scheme

- Borrowing

- Grants on credit to HMRC

What is a direct payment scheme?

banks and other financial institutions may make a payment from the deceased's account(s) directly to HMRC, even if they will not release assets to PRs yet

How can direct payment from bank to HMRC be requested?

PRs can request such a payment by completing an IHT 423

How can PRs use borrowing to raise funds to pay IHT?

- estate beneficiary may agree to lend the estate funds from assets passing outside of the succession estate (eg money in joint bank account)

- PRs may also borrow from a commercial lender, but better to avoid interest charges and use the above or a grant on credit instead

How can a grant on credit enable PRs to pay IHT?

- HMRC may allow the grant of probate to be issued before the payment of tax, if this is the only alternative to PRs taking out a commercial loan

- PRs must pay as much of the IHT due as possible before obtaining the grant, and then pay the outstanding amount when the grant is made and they can access T's assets

Is income accrued but not yet received treated as income?

- No, this is treated as capital for tax purposes

- will be treated as part of the taxable estate

- e.g., monthly salary that has not yet been paid, interest on a savings account not yet paid into account

What is probate value?

value of the property at the date of death

Which bank account should deceased's money be put in for a) lay executors and b) for solicitors?

lay executors - put money in a separate account

solicitors - put the money in the client account

What is interim distribution?

PRs can pay out a smaller amount to beneficiaries before finishing distribution of the estate

Who should receive copies of the grant once it has been received?

organisations that may need a copy e.g., banks, stockbrokers, life policies if paying to the estate (but not if they are paying out to third parties)

What deed adds a new trustee?

Deed of appointment

What is the power of advancement?

power that enables trustees to pay or apply capital to, or for the benefit of, a beneficiary

- power not a duty - does not have to exercise this

When is a Grant of letters of administration (with will) appropriate?

- Estates where the deceased left a valid will but no executors/those appointed are unwilling or unable to act

How do applicants demonstrate that they are entitled to the grant?

- Completing and then posting a paper application form to Probate Registry

or

- Submitting an online application via HMCTs service and answering the relevant questions

What are the 3 categories of professional applications?

1. Mandatory online application (includes most grants of probate)

2. Online application possible but not mandatory (includes some simple applications e.g. sole applicant and no minority or life interests)

3. Mandatory paper application (includes non-standard grants, and more complicated applications)

When will a grant require a mandatory paper application?

- Second grant of probate e.g. to an executor who previously reserved power

- Grants where chain of representation applies

- Grants where original will is missing or there are issues with the will

- Grants to those with power of attorney

- Grant where life interest arises

What is required for ALL application?

- PA1A or PA1P or online application

- Application fee + £ per sealed grant needed

What will be required for some applications?

MAY require:

- Will / Codicil (if testator made one)

- Form of Renunciation (if an executor is renouncing)

- Certified copy of the death certificate

- Power of Attorney (if an attorney is applying)

- Affidavit evidence

When will forms PA1A or PA1P apply?

paper applications for when deceased

- did not leave a will (PA1A)

- or did leave a valid will (PA1P) - regardless of whether executors are appointed

What information must be included in the application?

- confirm the identity of the deceased and the applicants

- justify the type of grant requested and their entitlement to act as PR

- value of the estate and inheritance tax (IHT) status of the estate

- complete the legal statement on the probate form confirming the information provided is correct and they will administer the estate properly

What information should be given about T's identity?

- full name of T, and any other names they were known by (so T can deal with assets held by either)

- last residential address (can be nursing home)

- domicile and marital status

- value of foreign property

What other documents must executors provide to receive a grant?

- original will and any codicils (these are not returned)

- If anyone named is not applying evidence is needed (eg the death certificate, form of renunciation)

- death certificate of the deceased (also needed for administrators)

What additional information should applicants under NCPR 20 include? (grant of letter of administration with will)

- which category of applicant they fall within

- clear-off anyone with a better right to apply (but not those with equal right)

- state whether any beneficiary is a minor or if any life interest arises (in either case, at least two administrators are then required)

What additional information should applicants under NCPR 22 include? (grant of letter of administration withOUT will)

- state their familial relationship to the deceased / identify which category of applicant applies

- confirm they are entitled to the whole or part of the estate

- clear-off anyone with a better right to apply (but not those with equal right)

- state whether any beneficiary is a minor (if so, at least two administrators are required)

What financial details do PRs need to provide?

- value of the net and gross succession estate

- confirmation that any IHT due has been paid - HMRC will give PRs a code to be used for application

What is the legal statement that applicants must provide?

- applicants formally confirm they will comply with their obligation to collect in and duly administer the estate

- and that the contents of the form are true.

- must be signed by each applicant or their legal representative acting for them.

Who pays the probate registry fee?

PRs - paid per sealed copy of the grant required

When will there be no application fee?

When estate is worth less than £5,000

When is a copy of the death certificate required for an application?

for administrators and executors (but not for applications by legal professionals)

What must be included with the application if executor/beneficiary appoints an attorney to make an application on their behalf?

- express declaration of why the named executor is not applying

- power of attorney form will also be submitted

Where is form IHT400 sent?

HMRC, not probate registry

How is land collected in by the PR?

- can be transferred into the name of the PRs

- or directly transferred to a beneficiary.

Which bank account should money collected in by PRs be put into?

- PR's bank account opened specifically to hold estate money and to prevent this being mixed with their personal funds

- or law firm client account (giving fair and reasonable sum of interest)

What does PR's duty to pay debts with due diligence mean?

not defined but creditors should normally be paid before the end of the 'executor's year'.

What will happen if PR fails to pay debts, even though they have assets available?

will be liable to the creditor and to any beneficiary for consequent loss (eg costs of proceedings to recover the debt)

Can PR's liability to creditors be excluded?

- no

- although liability to beneficiaries can be limited via express clause in the will

When is an estate solvent?

- if the assets are sufficient to pay all the funeral, testamentary and administration expenses, debts and liabilities

Is an estate solvent if there is not enough money to pay the beneficiaries' gifts?

Yes

- As long as it can pay off debts and administration expenses, it is solvent

- Debts will usually be paid first - but if you are able to pay off all of the creditors, does not matter in which order you do this

What is a secured debt?

a debt charged on part of the deceased's property during their lifetime (eg mortgage on their house)

Where will the money to pay a secured debt come from?

- the property charged with the debt will have the responsibility of paying the debt on it unless contrary intention is shown

- A general direction for debts to be paid out of residue is not sufficient to show contrary intention

- must specifically state that the beneficiary will receive the secured asset free of debt

What is the statutory order of application of assets towards payment of unsecured debts and administrative expenses for insolvent estates?

- assets in each category are exhausted before moving onto the next

1. property not disposed of by will (eg passing via intestacy) will be used for debt repayment first

2. residue of the estate

3. property the will sets aside for repayment of debts

4. money in the pecuniary legacy fund

5. specific gifts (will all be reduced by the same percentage, not the same flat amount)

Can the statutory order for paying debts be overriden by T (for unsecured debts)?

- Express wording in a will can override the statutory order

- eg an order for residue to bear burden of debts

Can the statutory order for paying debts be overriden by T (for secured debts)?

- Express wording in a will can override the statutory order

- but a general direction for debts to be paid from the residue is not enough

- must show specific intention for the beneficiary of the secured asset to receive the item free of debt

What is the doctrine of marshalling in estate administration?

- Allows beneficiaries to get compensation if their inheritance is reduced due to PRs incorrectly using their assets to pay a creditor

- they can claim against the assets inherited by another beneficiary, if those assets should have been used to repay the debts, not theirs.

Can PRs sell assets to pay debts?

Yes, they have a general power of sale

- but must comply with statutory order when deciding what to sell

What must PRs consider when they have a choice over which assets to sell?

- Capital gains tax implications of sale

- How easily or quickly a sale can be carried out

- Not bound by wishes of beneficiaries to retain a particular asset, but should heed them

Will a transfer from PR to beneficiary be a transfer for CGT purposes?

No, not considered a chargeable transfer

beneficiary inherits the asset at its probate value

What are the key responsibilities of PRs regarding Income Tax and Capital Gains Tax?

- Finalise the deceased's IT and CGT position for the tax year of death

- Pay IT and CGT that was due, or becomes due during the administration perion

- Submit a tax return on behalf of the deceased for the period 6 April to date of death

Is there a difference between tax status of the deceased, and of their estate?

Yes, different rates and reliefs apply to the gains/income of the deceased, and to the gains/income of their estate

What aspects of the deceased's income will PRs need to account for?

1. untaxed income due and paid to T before death

2. some income paid after death which relates to a period before death

- e.g., rent due on properties the deceased let, but which had not been paid

- final dividends declared before death but not paid

What will PRs need to consider re deceased's gains?

- PRs should utilise the deceased's tax-free allowances and pay tax at the rates applicable to the deceased.

- Death is not a disposal for CGT purposes and does not give rise to a CGT liability

- upon death, base cost of assets in the estate is 'up-lifted' to the date of death value - wipes out the gains that have accrued during the deceased's lifetime

Why might the estate be charged income tax?

- PRs may have to pay income tax at the basic rate if the estate assets generate income while in their hands

- eg receiving rent, interest or shares

- PRs are not entitled to claim an income tax personal allowance :(

- only at basic rate, will not go up to higher/additional

How do PRs report income tax on the assets they hold?

- PRs provide Form R185 to beneficiaries when distributing

estate income

- only required if total income is £500 or more per tax year of administration

What is the effect of Form R185 on beneficiaries?

- Bs who do not pay income tax can claim a tax refund

- higher/additional rate taxpayers will need to make a 'top-up' payment to HMRC and use R185 when completing their own tax return.​

Who is taxed on interest from bank accounts?

- bank interest paid before death is taxed as the deceased's income

- interest paid after death is taxed as the PRs' income

What are the main considerations for PRs regarding estate gains?

- PRs can claim the same tax-free allowance as an individual for CGT (unlike for income tax)

- Losses can be offset against other gains made during administration

- Only post-death gains are chargeable

- Chattel exemption applies

What is the chattel exemption for CGT?

a gain made on the disposal of a chattel is exempt from CGT if the disposal is for a consideration of £6,000 or less

What options do PRs have when administering non-cash assets, and what are the CGT implications?

Sell an asset and distribute cash to beneficiary/creditor

- Sale by PRs results in gain taxed as theirs

- if it results in a loss, could be used to set off a separate gain

Transfer an asset directly to a beneficiary

- Transfer to beneficiary is not a disposal, so no chargeable gain occurs

- Beneficiary acquires the asset at probate value for CGT purposes

What do PRs need to pay before paying out to beneficiaries?

debts, funeral, testamentary and administration expenses (or can set aside sum for paying them)

Is it possible to pay out specific gift before administration is complete?

Yes - provided sufficient assets will remain to meet any outstanding payments later

- partial payment, before the rest is paid later

How is land transferred to a beneficiary?

Assent for a legal estate in land (land registry form AS1)

Who will bear the costs of transfer if the will is silent on this?

beneficiary bears this (but also inherits free of IHT if will is silent on this)

Why might PRs delay distribution if they think there may be a claim under IPFDA?

- PRs may wish to delay distributions until ten months of the grant being issued

- because there is a six month deadline for issuing a claim and a further four months to serve notice of this

Why might PRs delay if they think there could be unknown creditors/beneficiaries?

PRs should not make distributions until after the two month deadline for being notified of claims by unknown beneficiaries and creditors (s.27 TA notice)

In what order are legacies paid?

1. specific

2. general

3. residuary

- if funds are insufficient, the residuary beneficiary's amount will be reduced first, and may get nothing

- if there still not sufficient funds, will reduce the general beneficiaries' inheritance

- legacies within each category abate proportionately (eg all general gifts reduced by 10%)

What is the power of appropriation?

- PRs are free to choose which assets to appropriate to the beneficiaries in settlement of their entitlement (eg an asset of that value rather than the cash value)

- but cannot give an asset whose value exceeds entitlement of the beneficiary

How can PRs get a receipt from minor beneficiaries? (5 ways)

1. An express clause in the will which gives PRs the power to accept receipt from a minor aged 16 or 17 (but no younger) is enforceable

2. Parent provides receipt

3. PRs to hold the gifted property themselves until the child is 18

4. Appoint trustees to hold the property for the minor and make payment to the trustees

5. Pay the legacy into court

What are the estate accounts?

- a record of the estate assets and how these have been administered

- PRs have a duty to keep these

- will be signed/approved by both PRs and residuary beneficiaries (indicating their approval) at the end of administration

What are the 3 component parts of estate accounts?

1. Capital Account

2. Income Account

3. Distribution Account

What is the capital account?

- Sets out the estate assets and liabilities at death.

- Records what has happened to each item during the administration (eg X has been sold)

- Liabilities such as pecuniary/specific legacies, IHT and solicitors' fees are included

- Will then show a balance which is available for distribution to the residuary beneficiaries.

What is the income account?

- Sets out the income received in relation to the estate assets during the administration and summarises how this was spent

- Income expenses (eg income tax) are then deducted as liabilities

- will then show a balance which is available for distribution to the residuary beneficiaries

What is the distribution account?

- distributions made during the course of the administration of the estate ('interim distributions') and the final balance due to be distributed

What are the legal requirements for making an affidavit?

- Jurat (authenticating statement) is signed by all parties and dated

- Completed and signed by the person witnessing (must be independent solicitor or commissioner for oaths)

- Witness's name, address and qualification must be stated

- The jurat must follow immediately on from the text and not on a separate page

What are common reasons for requiring an affidavit in probate matters?

where there is a valid will but there is something about the document which renders its validity or interpretation uncertain

eg if there is doubt about:

- Compliance with s.9 Wills Act

- Knowledge & Approval

- Date

- Physical condition of the will