Admisntration: dealing with the estate

Question 1

What is the Administration Period

Answer 1

The administration period starts immediately after the death of an individual and ends when the personal representatives (PRs) are able to vest the residue of the estate in the beneficiaries or trustees, depending on the will or intestacy rules.

Despite this, PRs hold office for life, and they are responsible for managing any discovered assets or liabilities even after the residue has been transferred.

Question 2

Duties of Personal Representatives (PRs)

Answer 2

Under Section 25 of the Administration of Estates Act 1925, the primary duty of PRs is to collect and manage the deceased’s real and personal estate and administer it according to the law. PRs are personally liable for any losses to the estate due to a breach of duty, referred to as “devastavit.” This liability applies to breaches they personally commit, not those committed by a co-PR.

Question 3

Types of Breach of Duty by PRs

Answer 3

PRs may commit several types of breaches of duty, including:
Failing to protect the value of estate assets.
Failing to pay the rightful recipients of assets (creditors or beneficiaries). Section 61 of the Trustee Act 1925 allows the court to relieve PRs from liability for breaches if the PRs acted honestly and reasonably and should be fairly excused.

Question 4

Protection Against Liability for PRs

Answer 4

PRs must properly administer the estate, and failure to pay creditors or beneficiaries makes them personally liable. Three potential issues faced by PRs include:

Question 5

Protection Against Liability for PRs

Answer 5

PRs must properly administer the estate, and failure to pay creditors or beneficiaries makes them personally liable. Three potential issues faced by PRs include:

1. Unaware or unknown creditors/relatives.
2. Inability to locate certain beneficiaries.
3. Potential claims under the Inheritance (Provision for Family and Dependants) Act 1975.

Question 6

Unknown Beneficiaries and Creditors (Protection via Section 27 Trustee Act 1925)

Answer 6

PRs can protect themselves from liability by advertising for claimants under Section 27 of the Trustee Act 1925.

They must allow at least two months before distributing the estate, advertising in the London Gazette, local newspapers, and other relevant locations.

After the notice period, PRs are not personally liable to unknown claimants, though claimants can seek recovery from beneficiaries.

Question 7

Searches and Distribution After Notice Period

Answer 7

Before distributing the estate, PRs should conduct searches in relevant registries (Land Registry, Land Charges Register, etc.) to check for liabilities related to the deceased’s property.

Once the notice period expires, PRs can distribute the estate based on known claims. PRs are not liable for unknown claims but claimants may still pursue recovery from the beneficiaries.

Question 8

Missing Beneficiaries and Creditors

Answer 8

Section 27 does not protect PRs if a known beneficiary cannot be found. PRs have several options:

• Retaining assets for the missing claimant.
• Taking indemnity from other beneficiaries.
• Taking out insurance.
• Applying to court for a Benjamin order, which allows distribution assuming the missing person is dead. This order protects PRs but claimants can still recover assets from the beneficiaries.

Question 9

Protection Under the Inheritance (Provision for Family and Dependants) Act 1975

Answer 9

If a claim is made under the Inheritance Act 1975 after the estate has been distributed, PRs are personally liable. PRs can protect themselves by waiting six months after the grant of representation before distributing the estate. If earlier distribution is necessary, they should retain enough assets to satisfy any potential claim.

Question 10

Devolution of Assets to PRs

Answer 10

Upon death, assets passing under the will or through intestacy rules automatically transfer ownership to the Personal Representatives (PRs). Real property devolves under section 1 of the Administration of Estates Act 1925 (AEA 1925), while personal property devolves by common law.

For executors, this transfer occurs immediately at the time of death, giving them immediate control over the assets.

However, for administrators, this devolution only takes place once the grant of representation is issued.

PRs hold these assets solely for the purpose of estate administration, meaning they must use them to settle debts, taxes, and other expenses before distributing the remaining assets to beneficiaries.

Question 11

Repayment of Loan for Inheritance Tax

Answer 11

If inheritance tax must be paid before the estate can be administered, PRs may need to take out a loan from the deceased’s bank to cover this cost. This often requires the PRs to give the bank a “first proceeds” undertaking, which obligates them to repay the loan using the first funds realized from the estate’s assets during administration. For example, money from the sale of property or investments must first go toward repaying this loan. Failure to honor this undertaking would constitute a breach of contract, leaving the PRs personally liable for damages or penalties resulting from the breach.

Question 12

Sale of Estate Assets to Pay Debts and Expenses

Answer 12

PRs have the authority under section 32(1) of AEA 1925 to sell any estate assets to cover debts and expenses. However, PRs must exercise considerable caution and responsibility when selecting which assets to sell. Key factors to consider include:

1. Will Provisions: If the will specifies which part of the estate should cover debts, funeral costs, or administrative expenses, PRs must follow these instructions. In most cases, these costs are paid from the estate’s residue. Only when all other assets are exhausted should PRs consider selling property specifically bequeathed to beneficiaries.
2. Beneficiaries’ Wishes: PRs should consult the beneficiaries of the residuary estate before selling any assets. Although PRs have legal authority to sell, beneficiaries often have strong preferences regarding which assets should be preserved or sold.
3. Tax Consequences: PRs should evaluate the potential tax consequences of asset sales, including any capital gains or losses. They should use available exemptions, such as the annual capital gains tax exemption. If selling at a loss, PRs may benefit from capital gains or inheritance tax relief.

Question 13

Settling the Deceased’s Debts and Liabilities

Answer 13

PRs are responsible for promptly paying off all debts and liabilities the deceased owed at the time of death. These debts could include unpaid utility bills, outstanding income tax, or personal loans.

PRs must take this responsibility seriously, ensuring payments are made in a timely manner. Delaying payment could result in accruing interest or penalties, for which PRs could be held personally liable.

This means that if a delay or failure to pay results in the estate suffering financial loss (e.g., through additional interest charges), the PRs could be required to cover this loss from their personal finances.

Question 14

Funeral Expenses

Answer 14

PRs are required to cover reasonable funeral expenses from the deceased’s estate. These expenses must be proportionate to the deceased’s social standing, position, and circumstances. For instance, a modest individual’s funeral should not be excessively elaborate, whereas a person of higher social standing might warrant a more substantial funeral.

PRs are only liable for these costs to the extent that the deceased’s estate has sufficient funds.

If the estate lacks the necessary funds, the PRs are not required to pay funeral expenses from their own resources. The determination of what constitutes “reasonable” funeral expenses depends on the facts and circumstances of each case.

Question 15

Testamentary and Administration Expenses

Answer 15

Although AEA 1925 does not specifically define “testamentary and administration expenses,” it generally refers to costs incidental to a PR’s duties. These expenses can include:

1. Costs of Obtaining the Grant: This includes legal and court fees associated with securing the grant of representation, which gives PRs the legal authority to administer the estate.
2. Costs of Collecting and Preserving Assets: PRs may incur fees from professionals, such as solicitors or valuers, to gather and preserve estate assets like property, stocks, or other investments.
3. Administration Costs: This includes solicitors’ fees for advising the PRs, or costs related to distributing the estate, such as obtaining valuations or liquidating assets.
4. Inheritance Tax: PRs are responsible for paying any inheritance tax due on the deceased’s assets in the UK that vest in them. This does not include property that passes by survivorship (e.g., joint tenancy property), where the tax is the responsibility of the beneficiary who inherits the property.

Question 16

Collecting and Preserving Assets

Answer 16

PRs are obligated to collect and preserve the deceased’s assets as quickly as possible. While some assets (e.g., cash found at the deceased’s home) may be immediately available, others may require the production of the grant of representation to third parties (e.g., banks or building societies).

PRs typically use an office copy of the grant to access these assets. After collecting the assets, PRs must preserve them pending the completion of the administration process.

In doing so, PRs are subject to the same standards of care and management as trustees, meaning they must act with reasonable care and skill in managing and investing the estate’s assets under section 1 of the Trustee Act 2000.

Question 17

Assets Passing Independently of the Will or Intestacy Rules

Answer 17

Certain assets do not pass through the will or intestacy rules and therefore do not devolve on PRs. These include assets like jointly owned property, where ownership automatically transfers to the surviving co-owner through the right of survivorship.

PRs have no legal authority or obligation to manage these assets, as they bypass the estate and pass directly to the co-owner.

For instance, if the deceased owned a house as a joint tenant with another person, the surviving co-owner would automatically inherit the entire property, without it being part of the estate for the PRs to administer.

Question 18

Solvent Estate

Answer 18

A solvent estate is one where the assets are sufficient to cover all the deceased’s expenses, debts, and liabilities. Even if there are no remaining funds to cover legacies, the estate is still considered solvent if it can settle all debts. The order of payment is governed by sections 35 and 34(3) of the Administration of Estates Act 1925 (AEA 1925). Beneficiaries may have their entitlements reduced if the assets earmarked for them are needed to cover debts.

Question 19

Secured Debts under Section 35 AEA 1925

Answer 19

Secured debts, such as a mortgage on property, are treated under section 35 of the AEA 1925. A beneficiary receiving property that is subject to a secured debt (e.g., a mortgage) inherits the asset along with the responsibility for paying off the debt. This rule holds unless the will expressly states otherwise, such as with a clause like “my cottage to my daughter free of mortgage.” A general direction in the will to pay debts from the residue does not cover secured debts unless explicitly stated.

Question 20

Unsecured Debts and Expenses (Section 34(3) AEA 1925)

Answer 20

Unsecured debts and testamentary expenses are paid following the statutory order outlined in section 34(3) of the AEA 1925. PRs must use estate assets in this order:
1. Undisposed property by the will.

2. Residuary property, after setting aside funds for pecuniary legacies.
3. Property specifically given for paying debts.
4. Property charged with paying debts.
5. Funds retained for pecuniary legacies.
6. Specifically devised or bequeathed property.
7. Property appointed under a general power. Residuary assets are generally used before assets specifically bequeathed to legatees.

Question 21

Statutory Order of Payment for Unsecured Debts

Answer 21

PRs must adhere to a specific statutory order when paying unsecured debts from the estate. First, any property not disposed of by the will (e.g., a lapsed share of residue) is used. Next, the residue of the estate is applied, followed by property specifically designated for debt payment. PRs are allowed to modify this order if the will explicitly states so, ensuring that debts and expenses are paid from the designated estate portions.

Question 22

Impact of Testator’s Intentions on Secured and Unsecured Debts

Answer 22

The testator can alter the default statutory order of asset distribution through explicit directions in the will. For example, a testator may state that a specific gift is “free of tax,” which shifts the burden of inheritance tax related to that asset to the estate. If no direction is provided, or if the gift is silent on taxes, the tax liability is treated as a testamentary expense. It is common for wills to specify that debts and expenses should be paid from the residuary estate, protecting specific bequests from being sold to cover liabilities.

Question 23

Insolvent Estates

Answer 23

An estate is considered insolvent if it does not have enough assets to cover funeral, testamentary, administration expenses, and all debts. In such cases, the Administration of Insolvent Estates of Deceased Persons Order 1986 governs how the estate should be distributed. Secured creditors, such as those with a mortgage, are prioritized and may sell the secured property. Unsecured creditors receive payment only from the remaining assets, which are distributed equally if insufficient to cover all debts.

Question 24

Example of Insolvent Estate Distribution

Answer 24

n the example of Rashid’s estate, he leaves behind assets worth £212,000 (a house, bank account, and personal effects) but debts totaling £220,000. The mortgage of £175,000 on the house is paid first because it is a secured debt. After the mortgage is settled, £37,000 remains for the PRs to pay other expenses. Funeral costs of £5,000 are deducted next, leaving £32,000 to pay unsecured debts of £40,000. Since there are insufficient funds, the remaining amount is distributed equally between the unsecured creditors.

Question 25

Breaching Duty When Administering Insolvent Estates

Answer 25

PRs must administer insolvent estates according to the statutory order. Failing to follow this order constitutes a breach of duty. For example, PRs must prioritize secured creditors and funeral expenses over ordinary unsecured debts. If PRs mismanage the estate by paying unsecured creditors or beneficiaries before settling higher-priority obligations, they may be personally liable for the unpaid debts. To avoid this, PRs should always assume the estate is insolvent in uncertain cases.

Answer 26

Rashid has passed away and left behind some assets and debts. He has written in his will that his entire estate (everything he owns) should go to his nephew. However, Rashid owes more money than he actually has, which makes it tricky to handle.

Here’s what Rashid’s estate includes:

£10,000 in a bank account.
Personal items worth £2,000.
A house worth £200,000, but with a mortgage of £175,000 still owed on it.
In total, Rashid’s estate also has debts, including:

£15,000 credit card debt.
£5,000 funeral costs.
£25,000 owed to a builder for work done on the house.
Now, Rashid doesn’t have enough money to pay all his debts, so everything needs to be prioritized.

Mortgage (secured debt): The mortgage company must be paid first because the debt is “secured” against the house. So, from the sale of the house (£200,000), the mortgage company gets £175,000. This leaves £25,000.
Remaining assets: The remaining assets are:
£25,000 from the house.
£10,000 in the bank.
£2,000 worth of personal items.
Total = £37,000.
Funeral costs: The funeral costs of £5,000 must be paid next. After this, there is £32,000 left.
Remaining debts (unsecured): The credit card debt (£15,000) and the builder’s bill (£25,000) are “ordinary unsecured debts,” which means they don’t get priority. But since there’s only £32,000 left, and these debts add up to £40,000, they won’t be paid in full.
So, the remaining money is split between them:

The credit card company gets £12,000.
The builder gets £20,000.

Because there isn’t enough money to pay everything, the debts are reduced proportionally (this is called “abating”). The personal representatives (PRs) handling Rashid’s estate must follow this process carefully to avoid making a mistake, especially when the estate is insolvent (when there are more debts than assets). If they don’t, it could be a breach of their duty.

he builder gets £20,000 and the credit card company gets £12,000 because the remaining money in Rashid’s estate has to be divided between the two debts proportionally based on how much is owed to each.

Here’s how it works:

The total remaining money after funeral expenses is £32,000.
The total unsecured debt (credit card and builder) adds up to £40,000 (£15,000 for the credit card and £25,000 for the builder).
Now, because there isn’t enough money to pay off both debts completely, they will be paid in proportion to the size of each debt.

The total debt is £40,000.
The credit card debt is £15,000, which is 37.5% of the total debt (£15,000 ÷ £40,000 = 0.375 or 37.5%).
The builder’s debt is £25,000, which is 62.5% of the total debt (£25,000 ÷ £40,000 = 0.625 or 62.5%).
The £32,000 remaining will be divided in the same percentages:

The credit card company gets 37.5% of £32,000 = £12,000.
The builder gets 62.5% of £32,000 = £20,000.
This is why the builder receives more than the credit card company—the builder was owed a larger amount, so they get a larger share of the remaining money.

Question 27

Paying Legacies

Answer 27

After paying funeral, testamentary, administration expenses, and debts, the Personal Representatives (PRs) must discharge the gifts made upon death. This includes gifts other than the residuary estate, such as specific and pecuniary legacies.

Question 28

Specific Legacies

Answer 28

Specific legacies refer to gifts of specific property left to a beneficiary in a will. PRs should transfer these assets to beneficiaries once they are certain the assets are not needed for paying debts or expenses. The method of transfer depends on the nature of the asset, such as an assent for property or a stock transfer form for company shares.

Question 29

Vesting of Specific Gifts

Answer 29

The vesting of specific gifts in a beneficiary is retrospective to the date of death. This means any income generated by the asset (e.g., dividends) from the date of death belongs to the beneficiary. However, the beneficiary only receives this income after the property is formally transferred by the PRs, and they are liable for any income tax due.

Question 30

Costs of Transferring Specific Legacies

Answer 30

The legatee (beneficiary of the specific legacy) is responsible for reimbursing the PRs for the cost of transferring the asset and any necessary insurance cover. If there is a dispute over the deceased’s title to the asset, the legatee bears the cost of litigation to establish ownership unless the will directs otherwise.

Question 31

Pecuniary Legacies - Provision in the Will

Answer 31

Pecuniary legacies are monetary gifts stated in a will. Often, the will specifies that these legacies must be paid before dividing the residuary estate. The PRs will pay pecuniary legacies from the residue before distributing the remaining assets to the residuary beneficiaries.

Question 32

Pecuniary Legacies - No Provision in the Will

Answer 32

If no specific provision for pecuniary legacies is made in the will, PRs typically pay these legacies from the residuary estate. Personalty (movable property) is used first before resorting to realty (immovable property). In cases of partial intestacy, ready money is usually used to pay pecuniary legacies first.

Question 33

Time for Payment of Pecuniary Legacies

Answer 33

Pecuniary legacies are typically payable at the end of the executor’s year—one year after the testator’s death. If payment is delayed beyond this period, the legatee is entitled to interest, either at a rate prescribed by the will or as determined by the rate payable on money paid into court.

Question 34

Exceptions for Interest on Pecuniary Legacies

Answer 34

Interest on pecuniary legacies may be payable from the date of death in certain cases, such as when the legacy is:
(a) in satisfaction of a debt owed by the testator,
(b) charged on the testator’s land,
(c) for the testator’s minor child (unless other funds for maintenance exist), or
(d) for a minor with the intention of providing for their maintenance.

Question 35

Completing the Administration

Answer 35

Once the PRs (Personal Representatives) have settled funeral, testamentary expenses, debts, and legacies, they can proceed with distributing the residuary estate according to the will or intestacy rules. All outstanding matters, such as inheritance tax (IHT), income tax, and capital gains tax (CGT), must be dealt with before finalizing the estate accounts and distribution.

Question 36

Adjusting the Inheritance Tax (IHT) Assessment

Answer 36

Adjustments to IHT may be necessary due to additional assets or liabilities discovered, lifetime transfers made by the deceased, provisional value agreements, or sales after death that qualify for inheritance tax loss relief. Such adjustments ensure that the correct IHT is assessed and paid.

Question 37

Inheritance Tax Loss Relief

Answer 37

If PRs sell assets for less than their probate value (market value at the date of death) within 12 months of the death, they can claim loss on sale relief. This reduces the IHT liability of the estate. This relief applies to “qualifying investments,” like shares quoted on recognized stock exchanges and unit trusts, sold by PRs.

Question 38

Continuing IHT Liability for PRs

Answer 38

PRs may opt to pay IHT by instalments on certain property. They remain liable for future instalments and should retain sufficient assets to cover unpaid tax. If PRs distribute all assets and rely on beneficiaries to pay the tax, they remain liable if beneficiaries default or become insolvent.

Question 39

Inheritance Tax on Lifetime Transfers

Answer 39

If the deceased made a potentially exempt transfer (PET) or lifetime chargeable transfer (LCT) within seven years of death, IHT may still be payable. The PRs may become liable if the donees do not pay the tax within 12 months of the deceased’s death. PRs should seek protection and clearance from HMRC using form IHT30.

Question 40

PRs’ Income Tax Liability

Answer 40

PRs are responsible for filing the deceased’s income and capital gains tax returns from the start of the tax year to the date of death. PRs are also liable for income tax on any income generated during the administration of the estate (e.g., rent or interest). They must pay tax at rates of 8.75% for dividends and 20% for other income.

Question 41

Capital Gains Tax (CGT) for PRs

Answer 41

PRs must pay CGT on any chargeable gains realized from selling estate assets during the administration period. They pay CGT at flat rates—20% for most gains and 28% for gains on residential property. PRs may deduct the probate value and costs of disposal from the sale proceeds.

Question 42

CGT Annual Exemption for PRs

Answer 42

PRs can claim the annual CGT exemption for disposals made in the tax year of death and the following two tax years. In 2023/24, the exemption is £6,000. PRs should carefully plan asset sales to maximize the benefit of this exemption and minimize taxable gains.

Question 43

Is Capital Gains Tax (CGT) payable on death itself?

Answer 43

No, CGT is not payable on death itself.

Question 44

What happens if Personal Representatives (PRs) sell assets during estate administration?

Answer 44

PRs make a disposal when selling assets, and their acquisition value is the market value at the date of death. They have an annual exemption equal to an individual’s exemption for the tax year of death and the two following tax years.

Question 45

What is the rate of Capital Gains Tax (CGT) payable by PRs on asset sales?

Answer 45

PRs pay 20% CGT, except for gains on residential property, which are taxed at 28%.

Question 46

Do PRs incur CGT when transferring assets to beneficiaries?

Answer 46

No, PRs do not make a disposal when transferring assets to beneficiaries. The beneficiary acquires the asset at market value at the date of death.

Question 47

What must PRs calculate during the administration period?

Answer 47

PRs must calculate their income tax and any CGT liability on assets disposed of for administration purposes during the administration period.

Question 48

How must CGT on the disposal of UK residential land be handled during estate administration?

Answer 48

CGT on the disposal of UK residential land must be paid within 60 days of completion.

Question 48

Under what conditions is an estate classified as “complex”?

Answer 48

An estate is considered “complex” if:
(1) The value exceeds £2.5 million,
(2) Tax due for the administration period exceeds £10,000, or
(3) Assets sold in a tax year exceed £500,000.

Question 49

What must PRs do before making final distributions to residuary beneficiaries?

Answer 49

PRs must ensure that all outstanding tax, legal costs, and other matters have been settled. Interim distributions made to beneficiaries must be accounted for when determining final distributions.