9. Administration: Dealing with the Estate Flashcards
Administration Period
The ‘administration period’ commences at the moment immediately following the death and ends when the PRs are in a position to vest the residue of the estate in the beneficiaries, or the trustees if a trust arises under the will or the intestacy rules.
Duration of the office of PR
For life
Primary Duty of the PR wrt administering the estate
The primary duty imposed on PRs is found in s 25 Administration of Estates Act 1925 (AEA 1925). The PRs must ‘collect and get in the real and personal estate of the deceased and administer it according to the law’.
If a PR has breached a duty of office, can the court excuse them from liability?
Yes, s 61 Trustee Act 1925: Court has power to relieve a PR from liability if it is satisfied they have acted ‘honestly and reasonably’ and ought fairly to be excused from the breach
Can a PR be protected from liability for breaches in the will document itself
Yes, if there is a clause to this effect
What items can pass outside of the grant
- Moveable personal property can normally be sold without a grant
- Cash found in the home
- Joint property
- Life policy if written NOT to the estate
- Accounts with less than 5000 in them (Admin of Estates Small Payment Act)
What should PRs do to protect themselves from liability from unknown beneficiaries / creditors
- Comply with s 27 Trustee Act Requirements:
i. Wait 2 months after grant before distributing
ii. Advertise ASAP after death the intended distribution by London Gazette / advertisement in locality of deceased or any other means appropriate
If a PR follows the notice requirements in s 27 Trustee Act when distributing estate and an unknown Beneficiary STILL comes forward - can they get anything?
The unknown beneficiary may have a claim against the existing beneficiaries
- but not against the PRs
If PRs are unsure of the correct place to advertise to escape liability from an unknown beneficiary - what should they do?
They should apply to the court for directions
Content of a notice placed in London Gazette/ other publication protecting against liability from unknown beneficiaries / creditors
- Intended distribution of the estate
- Requires anyone interested to send in their particulars of claim within time specified in notice (no less than 2 months)
What should PRs do to protect themselves from liability from missing beneficiaries
They cannot evade liability under s 27 Trustee Act (like for unknown Bs + Cs) but they have several options
a. withhold assets temporarily
b. taking idemnity from beneficiaries
c. take out insurance
d. Benjamin Order
What is a benjamin order?
Authorising order from the court confirming that the missing beneficiary is dead
- Protected PRs from liability but not beneficiaries
How should PRs protect themselves from claims under the Inheritance (Provision for Family and Dependents) Act 1975
- Wait 6 months before distributing estate (from date of grant)
- if they cannot, should ensure they retain enough assets to satisfy an order
Which assets devolve to the PRs on death
Any assets which pass under the will or intestacy rules
- For EXECUTORS
Which assets devolve on issue of the grant of representation
Any assets passing under the will or intestacy rules to an administrator
PR duty wrt collecting the assets of the deceased
the PR has a duty to collect these assets as soon as practicable
If PRs need to sell assets to repay loans (for IHT) or pay debts / funeral expenses: what should they consider
- Provisions in the Will
- Wishes of the beneficiaries
- tax consequences
What is included in ‘testamentary expenses’
a. cost of obtaining the grant
b. cost of collecting in and preserving deceased’s assets
c. costs of administering the deceased’s estate
d. any IHT payable on death on property vested in the PRs
When is an estate considered solvent
When it has sufficient assets to pay expenses, debts and liabilities in full (ignore legacies)
Solvent Estates: How are secured debts of the estate paid?
- beneficiary taking assets takes them subject to the debt (unless contrary intention)
Solvent Estates: How are unsecured debts of the estate paid?
s 34(3) AEA 1925 provides order assets must be applied to pay debts and expenses
1. Property undisposed of by will subject to retention of a fund to meet pecuniary legacies
2. property included in a residuary gift subject to retention of a fund to pay pecuniary legacies not already provided for
3. Property specifically given for the payment of debts
4. Property charged with the payment of debts
5. the fund, if any, retained to meet pecuniary legacies
6. Property specifically devised or bequeathed, rateable according to value
7. Property appointed by will under a general power rateably according to value
When is an estate insolvent?
If there are insufficient assets to discharge the following in full: funeral, testamentary and administration expenses, debts and liabilities
If an estate is insolvent in which order are assets applied to debts
Order of distribution in the Administration of Insolvent Estates of Deceased Persons Order 1986 (SI 1986/1999) should be followed (generally, ranks debts and expenses in order of priority for payment)
- Secured creditors are better placed to realise the security
- Unsecured creditors will have to look to other assets
- Funeral and testamentary expenses have priority to unsecured debts
If a PR cannot ascertain whether an estate is insolvent or solvent, how should they administer it?
As if it were insolvent
Who is liable to pay income tax on a specific legacy over property which produces income?
The beneficiary with the interest in the item (as they will be getting the income from it)
If the deceased’s title to property passing via their will via a specific gift is disputed by a third party and litigation ensues, who is responsible for the cost?
The specific legatee will be responsible
If there is a pecuniary legacy in a will and no provision saying where payment will come from - where is it paid?
Generally from residuary estate by selling assets (personalty preferential to realty)
Timing for payment of pecuniary legacies
At the end of the executor’s year (one year after testator’s death) PR need not distribute before this
Delay in payment of pecuniary legacies - recourse?
If payment is delayed beyond a year the legatee may be entitled to interest by way of compensation (ie. that IR prescribed in the will or the rate payable on money paid into court)
If testator says when this interest is payable (ie. immediately) this tells you when the interest will be payable from
When is interest payable on a pecuniary legacy
EITHER:
- At the end of the executor’s year if PR’s delay distribution of the legacies
OR:
- payable from date of death IF
1. payable in satisfaction of a debt owed by testator to creditor
2. charged on land owned by the testator
3. payable to the testator’s minor child or
4. payable to any minor where the intention is to provide for their maintenance
IHT Tax Loss Relief: Adjustments
Where ‘qualifying investments’ are sold within 12 months of death for less than their market value at the date of death (ie ‘probate value’) then the sale price can be substituted for the market value at death and the inheritance tax liability adjusted accordingly
- Qualifying investments: shares or securities quoted on registered stockX at date of death and holding in authorised unit trusts
Is IHT Tax loss relief automatically applied?
No, it must be claimed, available when PRs make the sale not when beneficiary does so after transfer
After the estate is administered and IHT has been paid, do PRs remain liable for any IHT?
- Yes if paid in instalments: liable for the remaining instalments
- If there is a lifetime transfer, PRs may BECOME liable for IHT if the donee leaves the tax unpaid for 12 months after end of the month where the donor died
What is a corrective accounts
Submitted to HMRC, as a way of showing any variations in the deceased’s assets / liabilities and reliefs etc.
Once the PRs have administered the estate, paid the IHT, and sent in corrective accounts (if needed) what should they do to ensure no more liability for IHT?
PRs can apply to HMRC form IHT30 for confirmation that there is no more IHT payable
- certificate discharges all persons from liability to IHT (unless fraud or improper disclosure)
When does IHT30 NOT discharge PRs of IHT liability
If it was obtained through fraud or improper disclosure
Outstanding income tax / capital gains for the deceased: What must the PRs do
Immediately following death, PRs must make a return to HMRC of income and capital gains of the deceased for the period starting on 6 April before the death and ending on the date of death
- Even if the deceased died partway through the income tax year, the PRs can claim the same reliefs and allowances that would have been available
PRs paying outstanding income tax from the deceased, can they claim the same reliefs?
Yes
PRs and Income Tax
PRs are subject to income tax in their capacity as PRs on income paid to the estate during administration (or income generating activities) at these rates
Dividends 8.75% always
Other income: 20% always
No income tax if income of estate in a tax year does not exceed 500
If a beneficiary receives income until a will trust - do they pay income tax on it?
Not if it is below the 500 limit
If PRs take out a bank loan to pay the IHT, is there any relief for the interest payable on the loan?
Yes income tax relief should be available
If the PRs pay income tax on income generated from administration (ie. investing funds in a savings account), do the beneficiaries pay tax on this again?
The beneficiary would receive credit for tax already paid by PRs
- may be more tax to pay based on beneficiary’s own income tax position
Liability for CGT on Death
General Rule: On death, there is no disposal for CGT purposes, so that no liability to CGT arises. On death, there is no disposal for CGT purposes, so that no liability to CGT arises.
When are PRs liable to pay CGT
If they make a disposal of chargeable assets during administration (ie. to pay tax) must pay CGT on chargeable gains
CGT rates for PRs
20%
- Residential property at 24%
How does the CGT calculation differ for PRs selling chargeable assets (as opposed to individuals)
The acquisition cost will be probate value (not the initial purchase price)
- may deduct incidental costs of disposal from disposal consideration
- may deduct a proportion of the cost of valuing the deceased’s estate for probate purposes
Can PRs claim the annual CGT exemption?
PRs can claim the annual exemption for disposals made in the tax year of death and following 2 tax years only (3000 per year) (they are claiming an exemption equivalent to an individual’s, but are not claiming the ‘deceased’s exemption per se)
Is CGT payable when PRs transfer an asset to a beneficiary?
No
- will be payable if beneficiary sells the item
- initial purchase price will be considered probate value
Complex vs Simple Estates: How does this impact how PRs pay income tax / CGT?
Simple: PRs can make an ‘information payment’ without a tax return
Complex: return must be made to HMRC on income received on deceased’s assets and gains made on disposals of chargeable assets
What is a complex estate for administration purposes?
- value of estate exceeds 2.5M OR
- tax due for whole of administration period exceeds 10 000
- value of assets sold in a tax year exceeds 500 000
Timing of payment of CGT on disposals of UK residential land
Within 60 days of completion
How do PRs vest the legal estate in land to the beneficiary / donee entitled to it?
PRs vest the legal estate in land in the person entitled (whether beneficially or as trustee) by means of an assent, which will then become a document of title to the legal estate
Formalities for an assent
- in writing
- signed by the PRs
- Name person in whose favour it is made
Final stage of administering the estate: when are PRs released from their liability to beneficiaries?
When the residuary beneficiaries sign off on the estate accounts to indicate their approval
What do estate accounts show?
Purpose of the accounts is to show all assets of the estate, payment of debts, administration expenses and legacies and balance remaining for residuary beneficiaries
If the deceased testator died leaving behind their sole trader business - how should the PRs manage this?
The PRs can carry on the business with a view to realising the assets by sale as a going concern for the executor’s year
- only using assets within the business (not estate funds)
If PRs decide to continue running a deceased sole trader’s business with the intention of selling it - if the business takes on debts, who will be liable for these?
PRs are personally liable for debts incurred in running the business
- so PRs should get an indemnity from the estate from the expenses
- but if the estate is small, the risk that an indemnity will not be satisfied is significant and therefore it may be better to sell off the business in parts rather than as a going concern
Can administration costs reduce the value transferred of the estate for IHT purposes?
NO
