Estate administration can be a long and confusing process, often at a time when emotions can be high. While no two estates are ever the same, there are some common areas where clear guidance can help.

Roles and responsibilities in estate administration

We will often be asked, who is responsible for an estate following a death? Generally, this will be the Personal Representatives (PRs), who may be Executors or Administrators. However, it is common for the family to be involved in part, or even all of the process.

The PRs are required to ascertain all the assets and liabilities, complete any tax reporting, settle any debts of the deceased, and pay out the remaining estate under the terms of the Will or rules of intestacy.

However, family members often step in to provide practical support. For example, it is normal for the family to provide details of the assets and liabilities, or arrange the funeral, especially when a professional executor is involved who may not have intimate knowledge of the deceased’s affairs.

It is also perfectly reasonable for the PRs to seek professional support with some or all of the estate administration. Not everyone knows the Inheritance Tax (IHT) rules and regulations, or the process for applying for the Grant of Representation (GOR), i.e. Grant of Probate or Letters of Administration. Seeking professional advice in these circumstances is often better than trying to muddle through and potentially falling foul of rules the PRs weren’t even aware of.

Many people also have a Power of Attorney (POA) in place, to ensure their financial affairs are taken care of if they lose capacity. It is important to remember, however, that this authority doesn’t continue after death. When someone dies, the POA comes to an end, meaning the POA holders can no longer make decisions or take action on behalf of the deceased. Responsibility then passes to the PRs, who will deal with the estate administration.

That said, the POA holders can be very useful to the PRs, in helping gather the information for the estate. As part of their role POA holders may have managed the deceased’s assets and liabilities during their lifetime and should be able to provide details of the deceased’s financial affairs that the PRs need.

Why the process can take longer than expected

It is often underestimated how long it takes to complete the administration of an estate. From gathering the details of all the assets and liabilities, reporting them to HMRC, applying for the GOR, to encashing and gathering the assets, settling all the liabilities owed, and finally paying the beneficiaries of the Will, the process often takes much longer than anticipated.

It can easily take two years or more to complete the administration of even relatively straightforward estates. If there are additional complications relating to residence, identifying assets and liabilities, complex tax and valuation issues, etc. the estate administration could run for many more years beyond this.

While the responsibility of all this falls on the PRs of the estate, they are often dependent on various institutions and organisations whose processes they must follow.

A prime of example of this would be the “simple” task of getting a bank statement showing the cash balance at the date of death. In a normal situation you would expect to be able to log in to the online bank account, or even go into the bank, to obtain one. However, for PRs, it isn’t that simple. Firstly, the PRs will need to register the death with the bank and provide a death certificate and a copy of the Will, if there is one. This normally takes a few weeks to be registered by the bank before they will issue any information.

The same process is then normally followed by every bank, investment manager, utility company, or service provider the deceased was connected to. This can lead to lengthy delays if there are not enough death certificates to send to each company at once.

There are also often delays with HMRC and the probate, with the typical GOR taking between eight to sixteen weeks, but often even longer when the application cannot be made online, to be issued once the forms are submitted.

If the deceased’s house also needs to be sold, that could add a further few months to the process.

All of this is time spent waiting on others before any actual work can be undertaken by the PRs.

HMRC requirements: tax reporting and tax deadlines

Inheritance Tax reporting

Most people are aware that PRs need to arrange payment of IHT, if due, by the end of the sixth month after the death. However, it can sometimes be overlooked that an IHT account may be required even when no tax is due. This typically applies to large estates of more than £3 million, where the deceased has made gifts over £250,000, or if the deceased was entitled to income from a trust. IHT accounts are due at the end of the twelfth month after the date of death. There are other situations where an IHT account could be required, and PRs should seek advice if they are unsure.

Income Tax and Capital Gains Tax

Beyond the expected IHT account, it can easily be forgotten that PRs will also need to pay income tax and capital gains tax if the estate receives taxable income or generates any taxable gains during the administration period.

HMRC provides two methods for reporting this, depending on the amount that needs to be reported.

1. Informal reporting for smaller estates

For small estates with minimal income and gains, this can be reported under the informal arrangement. This allows PRs to report all the income and gains in one go, by writing to HMRC, enclosing all the details, and paying the tax. There are three conditions that must be met to allow this:

• The deceased’s estate was valued at less than £2.5 million

• The total income tax and capital gains tax due is less than £10,000 for the entire administration period

• The PRs did not sell more than £500,000 worth of assets in any single tax year during the administration period.

2. Tax returns

If any of the three conditions are not met in the tax year when the death occurred, the PRs will be required to file a tax return for each year the administration period is ongoing.

When PRs are required to file tax returns, the same deadlines for filing tax returns and paying tax for individuals apply to estates.

• Paper returns must be submitted by 31 October following the year end.

• Online returns are due by 31 January following the tax year end.

• Any tax due must be paid by 31 January following the tax year end.

• If payments on accounts are also required for the following tax year, they are due on 31 January after the tax year end and 31 July of the following year.

Reporting exception

There is one exception for reporting income. Where income in a single tax year is below £500, the income for that tax year does not need to be declared to HMRC, either in a formal tax return or under the informal reporting arrangement. However, if a tax return has been issued by HMRC, a nil return may still need to be submitted.

Penalties and interest

HMRC imposes penalties when an IHT account or tax return is not submitted on time and interest accrues if tax is paid late. HMRC also impose late payment penalties if the income or capital gains tax is paid late.

Dealing with personal possessions, or chattels, after death

The easiest way to think about many items that should be included in chattels is to imagine tipping your house upside down; anything that falls out could reasonably be called a chattel.

For most people the total value of these items would not be significant compared to the value of the rest of the estate. In situations like this, HMRC will normally be reasonable and accept an estimated value, so long as any single items worth more than £1,500 have been formally valued and are reported separately in the IHT account. This can cover, jewellery, art, or even high value electronics.

One item that is often overlooked is any car the deceased owned. It would be typical for a car to be worth several thousand pounds or more, and this would also need to be reported on the IHT account.

The GOR is only needed to deal with property that passes to the PRs and for which they will need legal proof of title. Assets for which there is no legal proof of title are still part of the estate, but the GOR is not needed to deal with them. These would include chattels such as cars, phones, antiques and goods, provided they are not held purely for investment purposes.

A lot of chattels can be dealt with before probate is granted as proof of the legal title doesn’t need to be provided. This includes items such as jewellery, antiques, and furniture. The deceased’s car can usually be sold too, which can be a good way of providing some liquidity into the estate to cover early incidental costs, such as paying for death certificates or formal valuations.

Tax-free legacies and grossing up

Sometimes a Will is written in such a way as to provide a tax-free legacy to someone. This does not necessarily mean that the gift is not taxed, but that the residue of the estate may bear the cost of this tax. This can cause issues if the residue is left to someone who is exempt, such as a spouse or a qualifying charity.

This gives rise to a situation where the value of the gift must be “grossed up”, so that the full amount of tax due is paid on the grossed-up value and the beneficiary receives the full value of the gift.

This calculation becomes more complex if the only part of the residue is tax exempt, and results in a situation of double grossing up.

How we can help

When writing a Will, individuals should carefully consider the burden that will be placed on their PRs. While it might feel right to appoint family members to administer the estate, it is important to consider whether they would be comfortable carrying out the required duties. It is always best to discuss the role with your potential PRs before appointing them in the Will.

PRs should consider whether they will need to seek advice or assistance with any part of the estate administration. It may not be necessary to get help with every aspect of the estate, instead, specific advice can be sought on just one area if that is all that is required.

Buzzacott’s Probate and Estate Administration team can provide support at every stage of the process, from advice on individual tax or reporting points to full estate administration support. Please fill out the form below and one of our team will be in touch.