Administering the Estate Flashcards
what is the administration period?
= immediately after death until all the property has passed to the Bs
how long do PRs hold office?
- PRs hold office for life (unless revoked by the court), if more assets or liabilities are discovered in the future, PRs must deal with them
how can PRs protect themselves from liability?
- waiting 6m to avoid a family provisions claim
- complying with s27 TA 1925
- Retain assets in case they appear.
- Indemnity from other Bs that they will meet any future claims.
- Insurance (expensive and PRs liable for any shortfall)
- Benjamin Order
re: protection against liability
how long should PRs wait to distribute an estate and why?
Waiting 6 months from the date of GOR before distributing the estate protects PRs from Family Provision claims. Otherwise, PRs will be personally liable
re: protection against liability
what does s27 TA 1925 do?
- s27 protects PRs from claims against unknown Bs and creditors where they have satisfied the advertisement requirements
re: protection against liability
what are the s27 requirements?
The advert must be in:
The London Gazette;
If there is land in the estate, a newspaper local to the land; and
Anywhere else if there are circumstances which mean it would be appropriate to advertise elsewhere.
* If there is any doubt about what notices to be given, PRs should seek directions from the court.
Advert must state that any interested person must send particulars of claim within a specified date (not less than 2 months from date of publication)
Publication of the advert:
Es can advertise any time after death
As can advertise any time after GOR
re: protection against liability (s27)
where must the advert be?
The advert must be in:
The London Gazette;
If there is land in the estate, a newspaper local to the land; and
Anywhere else if there are circumstances which mean it would be appropriate to advertise elsewhere.
If there is any doubt about what notices to be given, PRs should seek directions from the court.
re: protection against liability (s27)
when can the advert be published?
Es can advertise any time after death
As can advertise any time after GOR
re: protection against liability (s27)
what is the time scale?
- PRs must wait 2 months from the date of publication to distribute the estate.
re: protection against liability (s27)
what obligation is on the PR?
- PR should make search a prudent land owner would i.e. Land Registry and Land Charges Registers
re: protection against liability (s27)
what can B do if PRs are protected?
- If PRs are protected under s27, Bs can still follow/trace the assets to other Bs
re: protection against liability (s27)
when does s27 not offer protection?
- s27 does not protect PRs where they knew of a B or a creditor but could not find them or against successful family provision claims
i.e. if PRs knew about B/creditor and overlooked them no s27 protection
re: protection against liability
explain a Benjamin order
allows PRs to distribute the estate on the basis that the potential claimant is dead. Only way to get full protection. Expensive.
The court will require evidence that the fullest possible enquiries have been made to trace the person.
If granted, the missing B could still follow/trace the assets to other Bs.
what are the stages to administration of the estate?
- collecting assets
- paying funeral, testamentary expenses and debts
- distributing legacies
- paying tax
- distributing the residuary estate
- estate accounts
re: collecting the estate
how does ownership of assets pass to PRs?
Ownership of assets passing under the will / IR automatically devolves to PRs
i.e. JTs property, some life policies etc will not devolve to the PRs. PRs do not owe any duties to these assets
re: collecting the estate
what must PRs do in relation to the devolved assets?
- PRs must still collect in the devolved assets
- Once collected, PRs will need to preserve them until they are distributed
o PRs essentially have the same duties as trustees in terms of management, investment and duty of reasonable care
re: paying debts etc
when should debts etc be paid?
- Debts etc be paid as soon as money becomes available
re: paying debts etc
how must debts be paid?
- Debts must be paid with due diligence. PRs will be liable for any loss if they fail to do so (i.e. interest)
re: paying debts etc
what can PRs do in order to pay debt etc?
assets can be sold
re: paying debts etc
what must PRs consider when selling assets to pay debts etc?
PRs must consider:
o The will this may stipulate what part of the estate should pay debts etc. If not, statutory order of liabilities applies. PRs should not sell property gifted under a will unless all other options have been exhausted.
o B’s wishes should be respected as far as possible
o Tax consequences i.e. CGT payable on the sale of an asset
re: paying debts etc
when will there be a breach of duty?
- Failure to administer in accordance with the statutory order is a breach of duty
re: paying debts etc
what must be paid first?
- Any undertaking signed as ‘first proceeds’ to pay IHT must be paid first
re: paying debts etc
what is paid for from the estate as an ‘expense and liability’?
- reasonable funeral expenses
- testamentary expenses
- unsecured debts
NB: secured debts are paid by the recipient unless the will states otherwise
re: paying debts etc
what are reasonable funeral expenses?
reasonable will depend on D’s circumstances
re: paying debts etc
what are testamentary expenses?
- Testamentary expenses i.e. expenses incidental to the performance of the PRs (i.e. cost of GOR, collecting and preserving assets, solicitor’s fees, IHT)
re: paying debts etc
what is the general rule regarding IHT?
give examples
this is paid for by the estate as a testamentary expenses unless the will states otherwise, i.e.:
‘I give my vase free of tax’ IHT payable by estate
‘I give my vase’ where the will is silent, IHT payable by estate
‘I give my vase, subject to tax’ recipient B pays IHT
re: paying debts etc
what is the position regarding secured debts?
Secured debts (i.e. mortgages) are paid by recipient B, unless the will states otherwise i.e. ‘I give my property free of mortgage’ estate pays
If the estate is to bear the charge, the below applies.
re: paying debts etc
what is a solvent estate?
- i.e. an estate which has funds to pay all debts etc (irrespective of gifts to B)
re: paying debts etc
what should the PRs do if they are unsure as to the estate’s solvency?
o If PRs are unsure if the estate is solvent, they should treat it as insolvent
re: paying debts etc
when do the administration of a solvent estate rules apply?
- This only applies if there is no express contrary intention in the will
re: paying debts etc
in what order should the estate be applied to pay debts etc where the estate is solvent?
- Undisposed property, subject to the retention of a pecuniary legacy fund
- Residue estate, subject to the retention of a pecuniary legacy fund
- Property specifically given for the payment of debts (i.e. the will does not say what is to happen with any money left after payment of the debt)
o ‘my debts are to be paid from the proceeds of sale of my car - Property charged with the payment of debts (i.e. the will states any remainder will to go to a B)
o ‘debts are to be paid from the sale proceeds of my car & the balance to Jo’ - The pecuniary legacy fund (i.e. any gifts of money)
- Property specifically gifted – each gift will bear a rateable portion of the debt according to its value at death
- Property appointed under general power of appointment, rateably according to value
re: paying debts etc
in what order should the estate be applied to pay debts etc where the estate is insolvent?
- Secured creditors realise the secured property to repay their debt
- Funeral and testamentary expenses
- Unsecured creditors and other liabilities. They rank and abate equally
re: paying debts etc
when do the rules on insolvent estates apply?
when the estate cannot pay its debts and the estate is being administered out of court
re: paying debts etc
what is the calculation when creditors rank and abate equally?
o Workout total value of debts owed
o Sum of remaining estate / total debts = £[x] for every pound owed
o Value of debt 1 x £[x] = portion creditor will receive (repeat for each debt)
re: distribution of legacies
when can legacies been distributed?
Once it is confirmed a legacy is not required to pay the above, it can be transferred to B or a trustee if a trust is created (i.e. B’s interest is contingent
re: distribution of legacies
how are specified gifts vested? what is the effect?
In relation to specific gifts only, the vesting of an asset is retrospective to DOD
Effect B is entitled to income produced since DOD (i.e. any dividends). Bs are not entitled to the income as it arises, but when the property vests.
This means Bs are liable for any income tax from DOD
re: distribution of legacies - specific gifts
what costs must B pay?
- B must pay transfer costs; necessary insurance to protect the asset; costs of litigation if D’s title is disputed by a 3rd party, unless the will states otherwise
o Bs should reimburse the PRs if they have paid these costs
re: distribution of legacies
how are pecuniary legacies paid?
- If the will does not state which assets are to be used to pay any pecuniary legacies, they will be paid from the residue, with personalty (PRs will decide which assets) taking preference over realty.
- If there has been partial intestacy (i.e. a gift has failed and it is passing under IR) undisposed property with ready money being used first
re: distribution of legacies
what is the general position as to payment of pecuniary legacies?
- General rule payable at the end of the executor’s year and Bs are entitled to interest if there is any delay. The rate payable is either the rate:
o The rate payable on money paid into court or as prescribed in the will
re: distribution of legacies
what is the exception to the general position as to payment of pecuniary legacies?
- If the will states a specific date/event (i.e. immediately following death or contingency) when the legacy is to be paid, interest will run from this date
- Interest is payable from DOD when the legacy is payable:
In satisfaction of a debt to a creditor;
Charged on land owned by D;
Is to D’s minor child
Is to any other minor where D intends to provide maintenance for them
re: tax
why is IHT relevant at this stage?
- Adjustments (inc. reliefs) might need to be made to the IHT assessment
re: tax
how are adjustments to IHT made?
- This is done by submitting a ‘corrective account’ to HMRC
re: tax
what must PRs ensure they do?
- If PRs have chosen to pay IHT in instalments, they must ensure they retain sufficient assets to pay this
re: tax
explain IHT loss relief
- If a qualifying investment has sold within 12 months of death for less than its probate value, the sale price can be used instead of the probate value for IHT
- Qualifying investment = quoted shares and securities on a recognised stock exchange and holdings in authorised unit trusts
- Only available where PR sells the assets (i.e. not if transferred to B who sells)
re: tax - IHT loss relief
what is a qualifying investment
- Qualifying investment = quoted shares and securities on a recognised stock exchange and holdings in authorised unit trusts
re: tax
how is IHT loss relief claimed and when is it available?
- This is not automatic, it must be claimed
- Only available where PR sells the assets (i.e. not if transferred to B who sells)
re: tax
what is the general position regarding IHT on lifetime transfers?
donee of a LTT (inc. gifts where D gave the property away but continued to benefit from the property) is responsible for IHT
re: tax
what is the exception to the general position re IHT on lifetime transfer?
- if IHT remains unpaid for 12 months after the end of the month in which D died, IHT is payable by the PRs. They are only liable to the extent of the assets they have received in their capacity as PRs (or would have received, but for their neglect)
re: tax
explain IHT clearance
- PRs can apply to HMRC using Form IHT30 for an IHT clearance certificate
- This will discharge all persons from further IHT liability (unless there has been fraud or non-disclosure of material facts)
re: tax
for what periods are IT and CGT calculated?
- IT and CGT liability must be calculated for each tax year during the AP
re: tax - IT
what is PRs liability?
- PRs pay IT on income the estate receives (i.e. rent income, savings interest)
re: tax - IT and CGT
what must PRs do in relation to D’s liability?
- Immediately on death, PRs must file an IT and CGT tax return for the period of 6 April before death until the DOD
- Reliefs and allowances can be claim as if they lived the whole tax year
- Any tax liability will be a debt which must be paid by the estate
re: tax - IT
what are the tax rates?
8.75% dividends & 20% other income
there are no allowances available
PRs can claim relief for interest paid on a bank loan to pay IHT
re: tax - IT
when will PRs not pay this?
- If the income is less than £500 (the de minimis amount), PRs will not pay IT
o The interest will be paid to B who must include it on their own tax return
re: tax - IT
when will Bs receive the income? what happens?
- Bs will receive the remaining income after it has been taxed (i.e. net income)
- This will form B’s income and so will need to be included on their tax return
o PRs will give B a certificate confirming how much tax has already been paid. This will be used to determine how much tax B is liable to pay (i.e. they may need to pay more if they are a higher rate payer or get a rebate)
Example:
Gross rent income £4k - minus interest paid on IHT bank loan £1k = £3k
o £3k (taxable income) x 20% = £600 (IT payable).
o Net income for Bs = £2,400 (taxable income – IT payable)
re: tax - CGT
when does CGT arise?
- No CGT arises on death, so any CGT that may have been payable during D’s lifetime is effectively wiped out
- CGT is not payable when PRs transfer an asset to Bs.
- CGT is payable if the PRs sell an asset and make a gain.
re: tax - CGT
what is the base cost of the asset?
o The base cost of the asset going forward is the probate value (this applies when PRs sell the asset or if Bs do in the future)
re: tax - CGT
what are the tax rates?
o 24% for residential property & 20% all other assets
re: tax - CGT
give an overview of a CGT calculation
- Usual rules apply i.e. £3k annual exemption & deducting incidental costs
- Simple CGT calculation:
o Disposal value – base cost (i.e. the probate value) = gain
o Gain – annual exemption = chargeable gain
o Chargeable gain x rate of tax = CGT payable
re: tax - CGT
when can the annual exemption be claimed?
o The exemption can be claimed in the year D died and the following two tax years (asset sales can be planned to maximise this benefit)
re: tax - CGT
what can happen if a loss is made?
If a loss will be made, this can be set off against the gain of another asset in the same or any future tax year in the AP
o Any unused loss cannot be transferred to Bs.
o To avoid unused loss, PRs should plan the sale of assets carefully or transfer assets worth less than their probate value to Bs
re: tax
when and how is tax be paid on normal estates?
no tax return needed. Informal payment permissible.
Tax paid in 1 lump sum at the end of the AP, unless the CGT is payable on disposal of residential land which must be paid within 60 days of completion.
re: tax
when and how is tax be paid on complex estates?
must complete a tax return. Tax is payable by 31 January in the tax year following the return.
re: tax
what is a complex estate?
An estate is complex where:
o The value exceeds £2.5m; or
o The tax due for the whole AP exceeds £10,000; or
o The value of the assets sold in a tax year exceeds £500,000
re: distributing the residuary
what must PRs do before distributing?
check whether they may and interim distributions
- If PRs made any interim distributions during the AP, these must be deducted before B’s entitlement is transferred to them
re: distributing the residuary
what happens if B has a vested interest?
property can be transferred to them
o If B is a minor and the will permits, the property can be transferred to B. Otherwise it will be transferred to their parents/guardian (unless it is to be held on trust).
re: distributing the residuary
what happens if B is a minor with a vested interest?
o If B is a minor and the will permits, the property can be transferred to B. Otherwise it will be transferred to their parents/guardian (unless it is to be held on trust).
re: distributing the residuary
what happens if B has a contingent interest?
property to be transferred to trustees
re: distributing the residuary
how is property transferred?
this depends on the nature of the property, i.e. by assent or stock transfer form for shares
re: distributing the residuary
explain assent
Assent = a document to transfer ownership of land & property
Assent for personal property no specific form
Assent for land must:
* Be in writing,
* Signed by PRs
* Name the person it is in favour of (they will need to send to HMLR)
re: distributing the residuary
explain the transfer using a stock transfer form form shares
completed by PRs and given to the company with evidence of GOR. B then applies to be registered on the register of members.
re: distributing the residuary
how is property transferred from PR to trustee?
- Where the transfer is from PR to trustee:
o Realty there must be an assent
o Personalty PRs become trustee when the estate is administered
re: estate accounts
what are these?
- Final accounts are produced for residuary Bs
re: estate accounts
what form must these be in?
No prescribed form but must be clear and concise, but there are usually separate capital and income accounts (unless it is a small estate)
o If there are any life or minority interests, there must be separate accounts
o Must inc. any interim payments made to Bs.
re: estate accounts
what is the effect of this?
once they have been singed by the residuary Bs to confirm they are approved, this releases PRs from any further liability to account to Bs (unless it later transpires there has been fraud or failure to disclose assets)
