Administration: Post-grant

Question 1

Method of collecting in assets

Answer 1

Depends on the asset and the different procedures that the institutions have in place.

Most bank and building societies require withdrawal forms to be completed to collect the balance of bank accounts.

Personal possessions once collected should be stored and safeguarded.

The sale or transfer of investments can usually be arranged by a financial advisor.

Land registered at the land registry can be transferred into the name of the PRs if not being directly transferred to a beneficiary.

Question 2

Where should the money being collected in go?

Answer 2

• A PR’s bank account, or
• A law firm client account

Note: firm must provide credit interest of a “fair and reasonable sum”

Question 3

Payment of debts

Answer 3

As soon as assets are collected in PRs should begin to pay outstanding debts and funeral expenses.

PRs have a duty to pay debts with ‘due diligence’ - usually end of executor’s year

Failure to pay debts (when assets are available) means they will be liable to the creditor and any beneficiary for consequent loss.

Question 4

Payment of expenses

Answer 4

Repay any pre-grant loan if taken out.

Should also pay any general administration expenses as and when they arise during the administration.

For example:
- cost of valuing the estate assets
- probate fees
s. 27 notice costs
- professional legal fees for services provided to the estate

Question 5

What is a solvent estate?

Answer 5

An estate is solvent if the assets are sufficient to pay all the funeral, testamentary and administration expenses, debts and liabilities.

Question 6

What is an insolvent estate?

Answer 6

An estate is insolvent if the assets are insufficient to pay all the funeral, testamentary and administration expenses, debts and liabilities.

Question 7

Specific rules for secured debts

Answer 7

The asset which is secured will be used to repay the secured debt.
i.e. the asset will be inherited with that debt.

If the outstanding loan is greater than the value of the asset, the creditor will usually rank as an unsecured creditor.

Question 8

How are unsecured debts paid?

Answer 8

The order for which estate assets will be used to pay unsecured debts is:

1. Property not disposed of by a will
2. Residue
3. Property the will sets aside
4. £ in the pecuniary legacy fund (legacies are reduced proportionately according to value)
5. Property specifically given (chattels)

Question 9

What is marshalling?

Answer 9

This is a doctrine which can be used by beneficiaries whose assets have been wrongly ‘taken’ i.e. used to pay debts but were out of order.

Creditors do not have to return money but the beneficiary can make a claim against another beneficiary whose inheritance should have been used to pay the debts.

Question 10

Considerations when selling assets

Answer 10

PRs may need to sell non-cash assets to meet debts and expenses.

PRs have a general power of sale over the whole estate but need to comply with the statutory order.

Should also consider:
- Capital gains tax implications
- How easily or quickly a sale can be carried out
- Wishes of beneficiaries

Question 11

CGT considerations

Answer 11

• PRs acquire assets at their market value on the date of death
• Is PRs sell an asset which has increased in value
• To avoid CGT (or using tax free allowance), PRs should consider selling assets which have not risen in value
  NOTE: assets falling rapidly in value should be sold to preserve the value of the estate

Question 12

Are assets which have risen in value subject to CGT when transferred to a beneficiary?

Answer 12

No. This does not trigger CGT. A beneficiary is deemed to inherit the asset as its probate value.

Question 13

Wishes of a beneficiary

Answer 13

PRs are not bound to comply with the wishes of a beneficiary but should still take these into account.

IF a beneficiary wants to receive a particular item as part of their inheritance the PRs ought to respect these wishes and avoid selling the item where possible.

Question 14

Deceased’s income and gains

Answer 14

PRs are liable to pay and IT and CGT that the deceased owed at the date of their death.

PRs should record information and notify HMRC by submitting a tax return on behalf of the deceased for the period of 6 April to death.

Tax liabilities are an estate expense and payable from the estate assets. Also deductible from IHT. Refunds should be included.

Question 15

What is the deceased’s income?

Answer 15

• untaxed income due and paid before death
• 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

Question 16

Deceased’s CGT

Answer 16

Will have to consider any disposals before death - so relates to assets no longer owned on the date they died.

Remember to use deceased’s tax free allowance.

Note: death is not a disposal for CGT purposes and does not give rise to a CGT liability.

Question 17

Estate income

Answer 17

PRs may be liable to pay income tax is the estate assets generate income while in the hands of the PRs e.g. interest, dividends, rent

PRs pay at the basic rate and are not entitled to claim an income tax personal allowance.

PRs complete Form R185 and give it to beneficiaries when it has been distributed. R185 records income tax paid in respect of the asset the beneficiary inherits.

Depending on their income beneficiaries may be able to claim a refund or may have to top up the tax (higher or additional rate tax payer).

Question 18

What is the tax free threshold for reporting estate income to HMRC?

Answer 18

£500. If below PRs do not need to report to HMRC or pay income tax.
Does not need to be recorded in the R185 either and beneficiary will not pay tax.

Question 19

Estate gains

Answer 19

PRs may have to pay CGT if they sell assets which have increased in value since the date of death.

If they have decreased in value this is a loss and may offset against any gains.

Note: chattels are exempt from CGT if the disposal is for a consideration of £6000 or less.

PRs should consider tax efficiency - does it make sense to sell and use estate CGT allowance or does the beneficiary have a tax-free allowance left?

Question 20

CGT Tax efficiency

Answer 20

is it more tax efficient to sell the asset and give money to beneficiary or transfer the asset to the beneficiary so the beneficiary can sell it.

PRs cannot claim main residence relief - so may be more efficient to transfer to a beneficiary and when they qualify for it they can claim it.

If selling would mean a loss should consider whether the estate or the beneficiary has any gains against which to offset the loss.

Question 21

What do PRs need to complete before making distributions to beneficiaries?

Answer 21

PRs must:
- collect in assets and pay debts, funeral, testamentary and administration expenses

After, they have a duty to:
- distribute the remaining estate assets to beneficiaries

Question 22

What distributions should PRs make first?

Answer 22

PRs must make payments of legacies other than the residuary legacy first.

Distribution of the residue is the final step in the administration.

Question 23

What are interim distributions?

Answer 23

If the delay is hard on the beneficiary and PRs are confident there are sufficient funds, they may make early payment of part of a residuary beneficiary’s share before the end of the admin.

Beneficiary receives a balancing payment at the end.

Question 24

Distribution considerations

Answer 24

1. Identity of the beneficiary
   - Review the will to identify those entitled to legacies and apply rules of construction and/or intestacy rules.
2. Nature of the interest
   - est. if a beneficiary has a vested or contingent interest, or an interest under an express trust in the will
3. Property to which they are entitled
   - establish which items fall within a general gift of chattels or collection of items

Question 25

Different methods of transfer to beneficiaries

Answer 25

Chattels: delivery to the beneficiary

£ legacies: cheque or bank transfer

Shares: stock transfer form

Land: Assent for a legal estate in land (AS1)

Question 26

Timing considerations

Answer 26

Claims against the estate:
- PRs may wish to delay distributions for 10 months: claims must be made within 6 months of the grant being issues and they have 4 months to serve notice of the claim

S27 TA notice:
PRs should wait until after the two month deadline to for being notified of claims by unknown creditors and beneficiaries.

Question 27

Order of payment of legacies

Answer 27

• specific
• general
• residuary

If not possible to pay all the legacies they abate in reverse order.

So residuary beneficiary may take no benefit.

Specific gifts take priority.

If not all legacies can be paid within a category they are abated proportionally.

Question 28

Receipt from minor beneficiaries

Answer 28

Issue where minor beneficiary has a vested interest because they cannot give good receipt. Following options:

• Express clause in the Will which gives PRs power to accept receipt from minor aged 16 or 17
• Accept receipt by parent or guardian on their behalf
• PRs to hold the gifted property themselves until child is 18
• Appoint trustees to hold the property for the minor and make a payment to the trustees
• Pay legacy into the court

Question 29

What are the three main sections of an estate account?

Answer 29

• Capital account
• Income account
• Distribution account

Note: there is no prescribed format this is just what is commonly done

Question 30

What is included in a capital account?

Answer 30

• Sets out the estate assets and liabilities at death
• Records what has happened to each item during the administration (eg sold or transferred)
• Liabilities such as pecuniary/specific legacies and IHT are included and any solicitor’s fees
• Ultimately shows balance which is available for distribution to the residuary beneficiaries

Question 31

What is included in the Income Account?

Answer 31

• Sets out the income received in relation to the estate assets during the administration and summaries how this was spent
• Income expenses are then deducted as liabilities
• Income account then shows a balance which is available for distribution to the residuary beneficiaries

Question 32

What is the distribution account?

Answer 32

Sets out the residuary beneficiaries’ entitlement.

Includes distributions made during the course of the administration of the estate and final balance due to be distributed

Question 33

Who should approve and sign the and estate accounts?

Answer 33

The PRs and residuary beneficiary/ies