Wills and Administration - Administration

Question 1

Obtaining the Grant of Representation: Initial Assessment

If the deceased left a will appointing executors, what grant will they obtain?

If the deceased left a valid will but no persons able or willing to act as executors, who will be able to obtain a grant? What is that grant called?

If the deceased left no will or no valid will, what grant would be obtained?

Answer 1

Executors; grant of probate (Form PA1P).

Administrators:
- Grant of letters of administration with the will annexed (Form PA1P)
- Grant of letters of administration (Form PA1A)

Question 2

Obtaining the Grant of Representation: Initial Assessment

(1) What is the minimum number of PRs who can obtain a grant?

(2) When would two administrators be required?

(3) What gives the executors/administrators the authority to act?

(4) What is an important limitation on administrators’ authority to act?

Once the administrators do obtain this, it is conclusive evidence of three things:

Answer 2

(1) One (even where the estate includes land).

(2) .Where a beneficiary has a life interest or is an infant.

(3) Authority before grant

• Executors: the will.
• Administrators: the grant,

(4) The grant is not retrospective to the date of death, therefore they have very limited powers before a grant is obtained.

The administrator’s title to the assets; the validity and content of any will.

On (1) c.f. trustees only, for a trust of land there needs to be either two or a trust corporation.

Once the administrators do obtain the grant, it is conclusive evidence of:

• The administrator’s title to the assets;
• the validity and content of any will.

Question 3

Obtaining the Grant: Initial Assessment

To ensure that a will is admissible, it is necessary to check the following four things:

If there is a will, what must the solicitor establish?

In obtaining details of the deceased’s propety/debts, enquiries will be made to the deceased’s bank, and other relevant institutions. What would the bank require before giving such information?

Answer 3

• That the will is the last will of the testator;
• It has not been validly revoked;
• It is executed validly;
• It contains an attestation clause

The identity of beneficiaries and the nature/extent of their entitlements.

Sight of the death certificate.

Other things to check: failed gifts; if intestate, establish surviving family members.
Inform beneficiaries that you are holding personal data on them, the purposes for that, and rights of the beneficiaries as data subjects.

Question 4

Obtaining the Grant: Initial Assessment

What three types of assets pass to the PRs without a grant?

Assets for which a grant is not required

Answer 4

a. Certain assets not exceeding £5000 at the discretion of certain institutions.
b. Chattels.
c. Physical cash.

Within (a), three examples are:
- Money in National Savings Bank and Trustees Savings Bank
- National Savings Certificates and Premium Bonds;
- Money in building societies and friendly societies.

Question 5

Obtaining the Grant of Representation: Initial Assessment

What assets do not pass under the will or intestacy, and therefore do not need to be distributed by the PRs? (3 categories):

Answer 5

• Joint property
• Insurance policies assigned/written in trust.
• Pension benefits

Question 6

Obtaining the Grant of Representation: Initial Assessment

After details of all of the deceased’s assets have been gathered and a value attributed, IHT will be calculated.

(1) As a separate matter, the PRs must determine whether it is necessary to submit an____ to HMRC. When is this not be required?

(2) If IHT is payable, what would the PRs need to do before applying for the grant?

(3) HMRC will then email a receipt (IHT421) to HMCTS and informs the PRs that this has been done. The grant will not be issued until…

Assessment of IHT

Answer 6

(1) IHT account (IHT400). For an excepted estate.

(2) Send IHT400 and pay any IHT that is due before the grant to HMRC.

(3) The Probate Registry receives the receipt.

On (2) it is IHT401 for a person domiciled outside of the UK.

Where IHT is payable before grant, it is necessary to find way s to fund IHT, given that most of the deceased’s assets will be inaccessible (see later)

Question 7

Obtaining the Grant of Representation: Initial Assessment

What form is used where there is a will? (ie. for grants of probate or letters of administration with the will annexed)

What form is used where there is no will?

There is a fee payable unless the estate is below…

Preparing the application for grant

Answer 7

• PA1P.
• PA1A.
• £5000

Legal professionals make a grant of probate online (subject to a few exceptions).
Grants of letters of administration are generally made by post (subject to a few exceptions)

Question 8

Obtaining the Grant of Representation: Initial Assessment

If the probate registrar requires further evidence of the validity of a will, evidence can take the form of either:

In relation to execution, capacity and knowledge/approval, what might raise validity concerns?

When else might the probate registrar raise issues of validity? (3 other cases)

Additional Documents for validity

Answer 8

an affidavit or a witness statement verified by a statement of truth.

Absence of an attestation clause.

Where there is evidence as to:
- remote witnessing
- plight and condition
- lost previous will.

Question 9

Obtaining the Grant: IHT 400 required vs Excepted Estate

If the estate is not an excepted estate, the PRs will prepare the IHT400 and other supporting schedules.

(1) What are the contents of the IHT400?
(2) Other than an account, what is the IHT400 used for?
(3) When is the latest that IHT400 can be delivered?
(4) If it is not submitted, what is the consequence?

Answer 9

(1) An inventory of assets to which the deceased was beneficially entitled and liabilities.
(2) Claiming reliefs and exemptions, and calculating IHT payable.
(3) Within 12 months of the end of the month of death but the PRs should aim to submit within 6 months due to IHT time limits for interest.

(4) No grant of representation can be issued.

On (3) note that IHT is payable 6 months after death, so that is why the IHT400 form ideally should be sent at that time as well, otherwise interest is charged on the delay.

If an estate appears to be excepted, but is subsequently found not to be so, the PRs must submit the IHT400 within 6 months of the discovery.

Question 10

Obtaining the Grant: IHT 400 required vs Excepted Estate

There are three categories of excepted estates, all of which do not require IHT400 to be submitted.

What are the three categories of excepted estates?

Excepted Estates

In categories 1 and 2, the NRB can be increased for the purposes of increasing the excepted estate thresholds.

Answer 10

1. Small estates
2. Exempt estates.
3. Non-domiciled estates.

Question 11

Obtaining the Grant: IHT 400 required vs Excepted Estate

Broadly speaking, “small estates” are those where:

What are some conditions for the estate to qualify?

Excepted Estates: Small Estates

Answer 11

The gross value + PETs for IHT purposes does not exceed the current NRB (£325,000).

Conditions

• Deceased died domicilied in the UK.
• No more than £250,000 of the estate is held in trust.
• No chargeable transfers in the seven years before death, other than specified transfers up to £250,000.
• No more than £100,000 is property outside of the UK

Question 12

Obtaining the Grant: IHT 400 required vs Excepted Estate

What are specified transfers? (list of 4)

Excepted Estates: Small Estates

Answer 12

• cash
• chattels
• quoted shares
• an interest in land (unless the land is held in trust or is subject to a reservation of benefit).

These are permitted transfers. If the deceased transfered say unquoted shares in the seven years prior to death, the estate would not qualify as a small estate.

Question 13

Obtaining the Grant: IHT 400 required vs Excepted Estate

What are specified exempt transfers? (6 types)

(relevant also to Category 2)

Answer 13

Transfers of value made within seven years of death which are:

(a) Transfers between spouses;
(b) Gifts to charities;
(c) Gifts to political parties;
(d) gifts to housing associations
(e) maintenance funds for historic buildings;
(f) employee trusts

Question 14

Obtaining the Grant: IHT 400 required vs Excepted Estate

What are Category 2 “excepted estates”?

What are the conditions for an estate to qualify?

Category 2

Answer 14

• The gross value (including specified transfers) of the estate does not exceed £3 million and passes to the spouse or charity and the net value does not exceed the NRB.

Conditions
- Died domiciled in UK
- The gross value does not exceed £3 million.
- The net chargeable estate after deducting property subject to the spouse or charity exemptions, and liabilities, does not exceed the NRB.
- Chargeable trust property does not exceed £250,000
- Chargeable transfers (other than specified transfers) seven years prior to death do not exceed £250,000.
- Total trust property (i.e. including exempt amounts) does not exceed £1 million.

The crucial point is that the bulk of category 2 estates attract spouse or charity exemption.

Question 15

Obtaining the Grant: IHT 400 required vs Excepted Estate

What are the conditions for the estate to qualify as a Category 3 estate? the deceased was never domiciled or treated as domicilied in the UK, and…

Category 3

Answer 15

• Deceased never domicilied in the UK; and
• Assets in the UK under £150,000.

Question 16

Obtaining the Grant: IHT 400 required vs Excepted Estate

(1) Davina has died, leaving in her will £50,000 to her son Ernst; the residue to her husband Fernando. She was UK domiciled. Her only specified transfer was made two years ago when she gave £200,000 to Ernst.

Her estate consists of:

A jointly owned house of £1,400,000.
Quoted investments of £100,000
Bank and building society accounts of £50,000
Chattels of £15,000
Specified Transfer of £200,000
Debts £5000.

Is this an excepted estate and under what category if so?

(2) Fred died leaving his estate to his two children. His wife Gemma died last year and left everything to Fred.

Fred’s gross estate is £600,000 and consists of a house and money in the bank. He has made no lifetime gifts.

Is this an excepted estate and under what category if so?

(3) Adam has just died. His will leaves his estate to his wife Brenda and daughter Clare, in equal shares. He was UK domiciled and had made no lifetime transfers.

His estate = £210,000:

Jointly owned house with Brenda - £80,000
Building Society account - £100,000
Chattels - £2000
Life interest in a trust fund from his father’s will - £30,000
Debts £200

Is this an excepted estate and under what category if so?

Answer 16

(1) This is a Category 2 excepted estate. The aggregate value of the estate + the chargeable value of specified transfers does not exceed £3 million; Davina did not make CLTs in the seven years before death that exceeded £250,000. The net chargeable estate after deduction of liabilities and the spouse exemption + value of specified transfers and specified exempt transfers does not exceed the NRB of £325,000.

(2) This is a Category 1 excepted estate: Fred’s NRB is increased as a result of inheriting the whole of Gemma’s NRB.

(3) This is a Category 1 excepted estate: The gross value of Adam’s estate (i.e. before debts, exemptions and reliefs) is £212,000 and there were no lifetime gifts. The PRs will not submit IHT400.

Question 17

Obtaining the Grant: Paying the IHT

(1) When is IHT due according to the general rule?

(2) Which types of property qualify to be paid by (ten) instalments?

Answer 17

Six months after the end of the month of death and must be paid before the grant is obtained.

Instalment option properties:

(a) Land
(b) A business or interest in a business;
(c) Shares which immediately before death gave the deceased control of the company;
(d) Unquoted shares which do not give control if either:
- the holding is at least 10% of the nominal value and worth more than £20,000;
- The tax cannot be paid in one sum due to undue hardship; or
- IHT attributable to those shares + any other instalment option property amounts to at least 20% of the total IHT payable.

Question 18

Obtaining the Grant: Paying the IHT

When is IHT on instalment option property due?

How is IHT apportioned between instalment and non-instalment option property?

Answer 18

First instalment within 6 months of the end of the month of death. The nine subsequent instalments are due at annual intervals.

Using the estate rate formula.

Late payments attract interest.
For non-instalment, if the PRs elect not to pay by instalments, it is due wtihin 6 months in which the death occurred, and before the grant.

Question 19

Obtaining the Grant: Paying the IHT

Jane, who never married, died 8 November, leaving her entire estate to her sister. Jane owned a house, worth £400,000, and personalty (savings in banks and building societies and small shareholdings in various quoted companies) worth a total of £200,000. She had no debts and made no lifetime gifts.

1. How much IHT is payable?
2. How much IHT is payable on the non-instalment property?
3. How much IHT is payable on the instalment property?

Answer 19

1. Value payable = £600,000.
   No exemption/relief.
   £325,000 @0% £275,000 @40% = £110,000.
2. £200,000 before the grant as follows: £200,000 x (110/600,000) = £36,667.
3. £400,000 x (110/600,000) = £73,333 by instalments.

Question 20

Obtaining the Grant: Funding the IHT

Funding IHT before the grant is problematic as institutions will want to see the grant before releasing money.

Provide 5 options to fund the IHT.
3 other options for bonus points:

Answer 20

(a) Direct payment scheme (voluntary system for institutions).
(b) Use life assurance policy payable to the estate (if one exists)
(c) Use assets that may be realised without a grant.
(d) Loan from beneficiary.
(e) Bank borrowing

(f) National Savings accounts or Government stock
(g) Offer a heritage asset in lieu of tax.
(h) Obtain a grant of credit.

(g) can only be used if Secretary of State agrees and the item is “pre-eminent for its national, scientific, historic or artistic interest”.
(h) is rare, and the PR must demonstrate that it is impossible to pay IHT in advance.

Question 21

Obtaining the Grant: Forms PA1P and PA1A and online applications

In filling out paper applications for the grant, the applicant will state whether IHT400 and IHT421 were completed. Additionally, the PRs must specify the gross and net figures for the estate passing under the grant. What is this known as?

Why is this not the same as the IHT value?
What may reduce IHT, but are irrelevant for probate purposes?

Answer 21

The probate value.

Because the IHT value includes property that the deceased had an interest in, which do not vest in the PRs. For example, joint tenancies, life policies written in trust, pension schemes and a life interest in trust property.

• Business and agricultural relief.

Question 22

Obtaining the Grant: Minor Executor

Where one of several executors is a minor, what can be done?

What if the minor is the only executor appointed by the will?

Answer 22

Probate can be granted to the adult executors with power reserved to the minor at a later date.

A grant of letters of administration with will annexed is made for the use and benefit of the minor (on their behalf) until the minor turns 18. Once the minor turns 18, he can apply for a ‘cessate grant of probate’ if administration hasn’t completed.

In case of reservation to the minor, if that minor turns 18 while administration is ongoing, an application for double probate can be made, to enable the former minor to act as executor alongside the executor.

In case of the letters of administration, this is typically done by the minor’s parent or guardian.

Question 23

Obtaining the Grant: Executor renunciation

Executors may renounce their right to take the grant. Their rights as executor cease and administration proceeds as if they were never appointed.

What would prevent the executors from renouncing?

How is renunciation made?

Will executors who are also appointed as trustees remain trustees?

Answer 23

• intermeddling in the estate (for example, notfiying the deceased’s bank of the death).
• form PA15, signed by the renouncing person and witnessed. The renunciation must be filed at the Probate Registry.
• Yes. Must disclaim the trusteeship separately if they wanted to act in neither capacity.

Question 24

Give four examples where the letter of administration with the will annexed is the appropriate grant.

Answer 24

• Valid will but no executor able and willing to act.
• The will does not appoint executors.
• The executors predeceased or renounced.
• The deceased’s spouse was appointed sole executor, but divorced before deceased’s death.

Question 25

What is the order of entitlement to the grant of letters of administration with the will annexed according to NCPR 1987, r 20?

Answer 25

1. Executor’s executor
2. A trustee of the residuary estate;
3. Any other residuary beneficiary or person entitled through partial intestacy - or their PRs.
4. Any other beneficiary or creditor - or their PRs

Executor’s executor becomes the executor of the estate, by virtue of the “Chain of Representation”.

In all other cases, they are administrators.

Question 26

Where there are residual legatees with a vested interest vs contingent interest, which one takes preference?

Can a person in a lower rank apply apply if there is someone in a higher rank?

The applicant must explain the basis of their entitlement by “clearing off”, i.e.

Answer 26

The vested interest.

Only if the higher rank person is not willing and able to take the grant.

Explaining why nobody in a higher rahnk is applying and why they are entitled.

Question 27

A dies leaving a valid will giving £1000 to Fraz (aged 6) contingent on reaching 21 and the residue to Pardeep and Parminder. Who should apply?

Quentin’s will fails to appoint an executor. He leaves his estate to his wife Rose for life, remainder to his son Sam. Who should apply?

If there are several people entitled to act as administators then, as with executors, the grant will…

Can administrators have power reserved for a later stage?

If there are two or more people entitled in the same category, can a grant be made through an application without notice to the others?

Anyone can renounce their right to apply for a grant. What is the difference, though, with renunciation of administators and executors?

Answer 27

Both Pardeep and Parminder.
Both Rose and Sam.
…not issue more than four in relation to the same property.
No.
Yes.
An administrator does not ose the right to renounce by intermeddling.

Question 28

Administrators applying for grant

Can minors act as administrators?
Can their parents or guardians apply for a grant?

If there is a life interest or property passes to a minor, the court normally requires…

Answer 28

No.
Yes, if there are no adults in the same category.

…two administators to apply for the grant.

Question 29

Obtaining the grant: Grant of simple letters

When is a grant of simple letters of administration required?

What is the order of entitlement?

Answer 29

Where there is total intestacy.

NCPR, r.22

1. Surviving spouse
2. Children of the deceased and their issue
3. Father and mother of deceased.
4. Brothers and sisters of the full blood and their issue.
5. Brothers and sisters of the half blood and their issue.
6. Grandparents
7. Uncles and aunts of the whole blood and their issue
8. Uncles and aunts of the half blood and their issue.
9. Treasury Solicitor, if he claims bona vacantia.

If all persons entitled under the foregoing provisions are cleared off, a grant may be made to a creditor.

The entitlement is identical to the entitlement on intestacy. It applies where the deceased died on or after 1 January 1926, wholly intestate.

Question 30

Administration: Dealing with the Estate

When does the administration period commence?
When does the administration period end?

Answer 30

• Immediately following death;
• When the PRs are in a position to vest the residue in the beneficiaries (or the trustees, if a trust arises under the will or intestacy).

Question 31

Administration: Dealing with the Estate

What is the primary duty imposed on PRs?

Are PRs personally liable for loss to the estate resulting from their breach of duty?

Name two types of breach of duty:

Section 61 Trustee Act 1925 gives the court the discretion to relieve a PR from liability if satisfied that the PR has…

Answer 31

To collect and get in the real and personal estate of the deceased and administer it according to the law.

Yes (but not generally liable for breaches of their co-PRs).

1.Failing to protect the value of assets.
2.Failing to pay those entitled to assets.

Section 61 relief:
- acted honestly and reasonably
- ought fairly to be excused

Question 32

Administration: Dealing with the Estate

How can PRs protect themselves from unknown claims?

What could the claimant do in such a scenario?

Answer 32

By waiting two months before distributing the estate, and advertising for potential claimants.

Claim back assets from the beneficiaries who received them.

Question 33

Administration: Dealing with the Estate

1. In view of the minimum notice period of two months, PRs should advertise as early as possible. If they are executors, when may they advertise? When may administrators advertise?
2. The PRs must give notice of the intended distribution of estate, requiring any person interested to send in particulars of their claim (whether as creditor or beneficiary) by doing three things:
3. Each notice must require any person interested to send in particulars of their claim within the time specified in the notice, which must not be less than…

Answer 33

1. Executors: Any time after death.
   Administrators: any time after obtaining the grant.
2. Giving notice:
   a. Advertise in the London Gazette;
   b. Advertise in a district newspaper; and
   c. Such other notices elsewhere in England and Wales as would, in any special case, be directed by a court.
3. …two months from the date of the notice.

If PRs are unsure what notices should be given, they should apply to court for directions.

Question 34

Administration: Dealing with the Estate

Section 27 Trustee Act 1925 does not give protection to PRs who know there is a person with a claim but cannot find them. Therefore, where PRs cannot trace the beneficiary, what options do they have?

The last of these is known as a Benjamin Order. Before making an order, what will the court require?

Answer 34

(a) Retaining assets in case the claimant appears.
(b) Taking indemnity from beneficiaries.
(c) Taking out insurance to provide funds.
(d) Applying to court for authorisation to distribute on the basis that the claimant is dead.

Evidence that the fullest possible enquiries have been made to trace the person.

Question 35

Administration: Dealing with the Estate

What can the PRs do to protect themselve against personally liability in Inheritance (Provision for Family and Dependants) Act claims?

Answer 35

Wait more than 6 months after obtaining the grant of representation before distributing.

If earlier distribution is required, they need to retain sufficient assets.

Question 36

Administration: Collecting Assets

What do PRs need to do to acquire ownership of assets passing under the will or intestacy?

Once the assets are devolved on the PRs, the PRs have a duty to collect them as soon as is practicable. Having collected them, the PRs must preseve them pending the completion of the administration.

In preserving the assets, the PRs have the same powers as trustees, in relation to…. What duty are they subject to in this regard?

What obligations and powers do the PRs have in relation to assets passing outside of the will or intestacy? Give an example.

Answer 36

Nothing. Such assets automatically devolve on the PRs.

Trustee duties
- Management and investment;
- Duty of reasonable care and skill.

None. The deceased’s interest in property held as a joint tenant passes to the other joint owner under survivorship.

Question 37

Administration: Testamentary Expenses

As soon as money can be collected or realised from the deceased’s bank or through insurance policies, what should the PRs pay?

Answer 37

• Debts and liabilities
• Funeral expenses
• Testamentary expenses

Admin expenses (e.g. estate agents’ and valuers’ fees) arise during the course of administration.

Testamentary expenses: costs of obtaining grant, collecting and preserving assets, administering the estate and paying off IHT vested in the PRs.

Question 38

Administration: Solvent Estates

1. What is a solvent estate?
2. What is the effect of Section 35, Administration of Estates Act (AEA) 1925 in relation to secrured debts?
3. Section 35 AEA is subject to a contrary intention. How should the testator constitute such intention?

Answer 38

1. An estate in which there are sufficient assets to pay all expenses, debts and liabilities in full.
2. A beneficiary of charged property pays the debt.
3. There must be an express reference to the mortgage.

Question 39

Administration: Solvent Estates

What is the statutory order for the payment of funeral and testamentary expenses, and unsecured debts?

What is the effect of the will providing for a gift to be “subject to tax”?

Answer 39

1. Undisposed property (subject to a retained fund for pecuniary legacies).
2. Residuary gift (subject to a retained fund for pecuniary legacies).
3. Property specifically for the payment of debts.
4. Property charged with the payment of debts.
5. The retained fund for pecuniary legacies (if any)
6. Specific gifts (rateably according to value)
7. Property appointed by will under a general power (rateably according to value).

The beneficiary will pay the IHT, so it will not be a testamentary expense.

Property specifically charged with the payment of debts = testator directs that the asset is to be used for this purpose but any money left over from that asset is to go to a beneficiary “My debts to be paid from the proceeds of sale of my shares in X, and the balance to John”.

Question 40

Administration of assets; insolvent estates

When is an estate insolvent?

What is the consequence?

Answer 40

When the assets are insufficient to discharge funeral, testamentary and administration expenses, debts and liabilities.

Debts and liabilities are paid out in the following order:

(1) Secured creditors can sell their charged property.
(2) Funeral/testamentary expenses
(3) Ordinary unsecured creditors’ debts abate equally.

Administration of Insolvent Estates of Deceased Persons Order 1986

The assets are used up on debts alone. The creditors will not be paid in full (or at all) and the beneficiares receive nothing.

Question 41

Administration: Insolvent estates

An estate comprises:
- £10,000: bank account,
- Personal items: £2000
- A house: £200,000, subject to a £175,000 mortgage.
- Credit card debts of £15,000.
- £25,000 debt to a builder.
- Funeral costs of £5000.

How are the assets distributed?

Answer 41

(1) The bank is entitled to be paid £175,000 from the proceeds of sale of the house.

(2) PRs must pay the funeral expenses £5000.

(3) £32,000 remains. The credit card bill and builder’s bill are ordinary unsecured debts, totalling £40,000 together. These debts abate equally: the builder was owed 62.5% of £40,000. Therefore he is paid 62.5% of £32,000 = 20,000. The credit card provider is paid £12,000.

Question 42

Administration: Paying legacies

Once PRs are satisfied that specific legacies are not needed for the payment of expenses and debts, they should transfer property to the beneficiaries.

1. How is the legal estate in a house vested in a beneficiary?
2. If there is a specific legacy of company shares, what is required for the transfer?
3. For specific gifts, the vesting of the asset in the beneficiary is retrospective to… What is the effect of this?

Answer 42

1. By an assent.
2. A stock transfer form.
3. …the date of death; income produced by the property belongs to the beneficiary.

However, beneficiares are not entitled to the income as it arises, but must wait until the PRs vest the property in them.

Question 43

Administration: Pecuniary Legacies

Often a testator expresses the gift of the residuary estate to be “subject to pecuniary legacies”. What is the effect of this wording?

Generally speaking, how are the pecuniary legacies paid where the will contains no express provision? In essence, pecuniary legacies are paid from ____ (same as above), with ____ being used before ____.

When does partial intestacy arise?

Answer 43

Pecuniary legacies should be paid from the residue before the balance is paid to the residuary beneficiaries.

Pecuniary legacies are paid out of personalty. If necessary, proceeds of realty can be used afterwards.

When part of a gift of residue fails because one of the beneficiaries dies before the testator.

Example: A will leaves a legacy of £5000 to Des. There is no direction as to payment of that legacy. Residue consisting of personalty and realty is given by the will “to Errol if he shall survive me by 28 days”. Errol does survive by more than 28 days, so the residue is fully disposed of. How should the £5000 be paid?

From the personalty. If necessary, the proceeds of realty can be used afterwards.

Question 44

Administration: Time for payment of pecuniary legacies

When are pecuniary legacies generally payable?

Are PRs bound to distribute the estate before this time?

If the rate of interest is not prescribed in the will, what is the default rate?

Other than where the testator expressly provides, in what four situations is interest payable on a pecuniary legacy from the date of death?

Answer 44

At the end of the executor’s year (i.e. one year after the testator’s death).
No, but the beneficiary will be entitled to interest by way of compensation.
The rate payable on money paid to the court.

When legacies are:
(a) to satisfy a debt owed to a creditor;
(b) charged on land
(c) payable to testator’s minor child;
(d) payable to any minor where the intention is to provide for their maintenance.

Question 45

Completing Administration

Once the PRs have paid funeral and testamentary expenses, debts and legacies, they can consider the distribution of…

Before drawing up estate accounts and making this final distribution what must PRs deal with?

Answer 45

…the residuary estate.
IHT, income tax and CGT.

(primarily IHT)

Question 46

Adjusting the IHT assessment: Loss on sale relief

Adjusting IHT may be necessary, e.g. upon discovery of additional assets or liabilities or tax liability.

When is loss on sale relief available and what is its effect?

What are the conditions for this to apply?

What are “qualifying investments”?

Answer 46

Where PRs needed to sell assets to meet debts, tax liabilities or legacies, but did so below the market value. Effect: the sale price is substituted for the probate value for the purposes of the IHT adjustment.

Conditions
- A ‘qualifying investments’ was sold within 12 months of death for less than its probate value.
- The relief is claimed (it is not automatic).

Qualifying investments
- Quoted shares or securities
- Holdings in authorised unit trusts.

Probate value = the market value at the date of death.

Question 47

Completing Administration: IHT on lifetime transfers

If a transferee does not pay IHT on an LCT or PET within 12 months after the end of the month in which the donor died, who will be liable, and to what extent?

Answer 47

The PRs, to the extent of the deceased’s assets which they have received or would have received but for their neglect/default.

Question 48

Completing Administration: Income Tax

When must the PRs make a return to HMRC of income and capital gains tax of the deceased, and for what period?

Even though the deceased died part way through the income tax year, what may the PRs claim?

Income-producing assets (e.g. letting to tenants or dividends) are also subject to income tax. What are the two different tax rates the PRs will pay?

In what situation do PRs pay no income tax, in spite of the estate earning interest?

In calculating income tax, what may the PRs claim relief for?

Answer 48

Immediately following death. The period of 6 April before death to death.

The same reliefs and allowances as the deceased could have claimed had they lived for the whole year.

Dividends = 8.75%
Other income = 20%

Where the estate’s only income is interest of £500 or less.

Interest paid on a bank loan to pay IHT.

Question 49

Completing Administration: Income Tax - Example

Suppose the PRs’ only income is gross interest of £4000. They pay £1000 interest to the bank on a loan to pay IHT.

1. What is the income tax payable?
2. What is the net income for the beneficiaries?

Answer 49

1. £3000 x 20% = £600
2. £2400.

Question 50

Completing Administration: CGT

CGT is assessed on the difference between the purchase price and sale price (or market value where the asset is gifted).

1. The individual is allowed to deduct certain expenses and fees incidental to the sale, such as…
2. There is an exemption for the first part of the gains made by an individual each year known as the… How much is this?
3. On death, the PRs acquire all the deceased’s assets at… What is the effect of this? This value becomes the PRs’ base cost of all assets for future CGT purposes.
4. If PRs dispose of chargeable assets during administration, they are liable to pay CGT. At what rate?
5. What costs may the PRs deduct from the disposal consideration?

Answer 50

1. …conveyancing fees.
2. …annual exemption. £12,300
3. …their probate value at death; Any gains which accrued during the deceased’s lifetime are wiped out. It becomes the PRs’ base cost of all assets for future CGT purposes.
4. 20% or 28% for residential property.
5. For CGT purposes, PRs may deduct:
   - the acquisition cost (probate value)
   - incidental costs of disposal (e.g. stockbroker’s commission for shares)
   - a proportion of the cost of valuing the deceased’s estate for probate.

Question 51

Completing Administration: CGT Example

PRs need to raise £50,000 for administration expenses. They sell some investments for £50,000. The probate value of the investments was £27,700. There are no costs associated. The PRs have no unused losses.

What is the CGT payable?

Answer 51

Gain = Disposal value - probate value: £50,000 - £27,700 = £22,300.
Less annual exemption of £12,300 = £10,000.
CGT: £10,000 x 20% = £2000.

Question 52

Completing Administration: CGT

If the PRs sell assets for less than their value at death then an… will arise. This can be set against…
Can losses that are unrelieved at the end of administration be transferred to beneficiaries?
If, instead of selling assets, PRs vest the assets in the beneficiaries (or the trustees of a trust) do chargeable gains/allowable losses arise? Explain.

Answer 52

…allowable loss
…gains arising from other sales.
No.
No. The beneficiary (or trustee) is deemed to have acquired the asset at probate value.

Question 53

Completing Administration: CGT example

A testator by will leaves his residuary to Parvez. Among assets forming the residue are 1000 shares from XYZ. The testator had bought these shares for £1000 ten years before he died. The probate value of the shares was £5200 at death. When the shares were transferred to Parvez the value had risen to £10,000. Five years later Parvez sells the shares for £19,200.

What is the chargeable gain?
What is the CGT payable?

Answer 53

Gain = Disposal value - Probate Value: £19,200 - £5,200 = £14,000.
£14,000 - £12,300 = £1700.
£1700 x 20% = £340.

Question 54

Summing up CGT

The 5 key points about CGT and death:
1. Is CGT payable on death itself?
2. If PRs sell assets they make… Their acquisition value is the ____ i.e.
3. PRs have an annual exemption (collectively) equal to…
4. The tax rate payable is … or …
5. If PRs transfer assets to beneficiaries, they… The beneficiary acquires the asset at…

Answer 54

1. No CGT payable on death itself
2. If PRs sell assets they make a disposal. Their acquisition value is the market value at death = probate value.
3. The PRs have an annual exemption (collectively) equal to an individual’s in the tax year of death and the two following tax years.
4. The tax rate payable by PRs is 20% or 28% on residential property.
5. If PRs transfer assets to beneficiaries, they do not make a disposal. The beneficiary acquires the asset at probate value.

Question 55

Completing Administration: CGT and Income Tax - Administration period

For each income tax year during the administration period, the PRs must calculate their income tax and CGT liability. Provided the estate is not classified as a… they can make an informal payment without having to provide a…

When would an estate be considered “complex”?

Provided the estate is not complex, income tax and CGT are normally paid in one lump sum at the end of the administration period. However, CGT on disposal of UK residential land must be paid within…

Answer 55

…complex estate; tax return.

(1) The estate value exceeds £2.5 million;
(2) The tax due for the whole administration period exceeds £10,000; or
(3) The value of assets sold in any tax year exceeds £500,000.
…60 days of completion.