Administration of Estates Flashcards
On which assets does the liability for secured debts fall?
Charged property bears primary liability for the payment of the debt secured against it
- if and to the extent an outstanding loan is greater than the value of the asset, the creditor ranks as an unsecured creditor
- e.g., mortgage on deceased’s home - PRs should first pay mortgage on the house using the property to which it is secured
On which assets does the liability for security of unsecured debts/expenses fall?
Statutory order of priority determines which assets are used:
1. Property not disposed of by a will but subject to retention of £ for pecuniary legacies (‘pecuniary legacy fund’)
2. Residue
3. Property will sets aside the repayment of debt
4. £ in pecuniary legacy fund
5. Property specifically given
Unless varied by the will
What are the post-grant steps in administration?
- Notify HMRC of any changes to IHT (Form C4)
- Finalise IT and CGT
- Place s27 Trustee Act notice
- Collect assets
- Pay debts
- Pay expenses
- Distribute legacies
- Prepare estate accounts
- Make final distributions to residuary beneficiaries
What document confirms executors/PRs have authority to administer the deceased’s assets?
The grant of representation
Where should estate money collected in be paid into?
- PR’s bank account opened specifically to hold estate money (not mixed with personal funds)
- Law firm client account
When should PRs begin to pay deceased’s outstanding debts and funeral expenses?
As soon as assets can be collected
What property of the deceased can be used to make the deceased’s debts/liabilities?
All the deceased’s property can be available for this purpose
- any clause to the contrary is void
What is a solvent estate?
The assets are sufficient to pay all funeral, testamentary and administration expenses, debts and liabilities
What is marshalling?
Doctrine which beneficiaries can use if PRs take assets out of order to pay creditors
- Allows beneficiary to compensate themselves
E.g., shares a beneficiary was entitled to (subject to a bequest to B) were sold by executors to pay off a debt
- the beneficiary is entitled to compensation for the shares from the residuary
How should PRs chose which assets to sell?
- General power of sale over whole estate
- Use available cash, then sell non-cash assets
- Statutory order
- Avoid CGT
- Consider wishes of beneficiaries
Duty of PRs regarding deceased’s income?
- PRs liable to pay any IT and CGT that the deceased owed at the date of their death
- Use deceased’s tax free allowances and pay tax at rate applicable for deceased
Account for:
- untaxed income paid before death
- some income paid after death which relates to a period before death (rent due, dividends declared)
- Bank interest paid after death is always taxed as estate income
What is tax liability of deceased paid from?
Estate expense and payable from estate assets
Duty of PRs regarding deceased’s gains?
- Calculate CGT liability for disposals made by deceased before they died
- Utilise deceased’s tax free allowance
What happens to CGT upon death?
Death is not a disposal for CGT purposes and does not give rise to a CGT liability
- tax free uplift: on death, base costs of assets is uplifted to date of death value
Duty of PRs/beneficiaries regarding estate income?
- Estate income (interest, dividends, rent) between date of death and date of distribution
- Paid at basic rate
- No tax-free allowance
- PRs give a Form R185 to beneficiaries when estate income distributed
- Beneficiaries can use this to claim refund or higher/additional rate tax payers must top it up when they make their own tax return
- Total income does not exceed £500 per year = no requirement to report to HMRC
What is the position for bank interest?
- Bank interest paid before death = tax as deceased’s
- Bank interest paid after death = Taxed as PR’s
How is income of assets after distribution to beneficiaries taxed?
Taxed as beneficiary’s income
Duty of PRs for estate gains
If assets have increased in value since the date of death - there is a gain when they are sold
- amount of gain greater than tax free allowance = pay CGT
- PRs are liable if they make a disposal of assets during administration period
- PRs can claim tax free allowance (unlike IT)
- any losses can be offset against other gains made during administration
- value of estate assets = date of death value
What gains are chargeable?
ONLY post-death gains
- gains made by deceased during their lifetime in relation to assets they still own at death, are not taxed
What is the chattel exemption?
Gain made on disposal of tangible asset is exempt from CGT if disposal is for £6,000 or less
At what value do PRs and beneficiaries acquire the assets?
- PRs acquire at date of death - tax-free uplift
- Subsequent transfer to beneficiary - no chargeable gain
- Beneficiary acquires asset at probate value (date of death) - not the date of transfer
Are tax liabilities a deductible expense for IHT purposes?
Yes, tax liabilities are a deductible expense when valuing the estate for IHT purposes
Order PRs distribute assets to beneficiaries
- Specific gifts
- General legacies
- Residuary legacies
Who bears the cost of transfer?
Beneficiaries bear the costs of transfer of asset
