If you’re an executor/Personal Representative, you may be missing opportunities to reduce the tax due on the estate or needlessly overpaying because you’re unaware of the availability of potential reliefs or unfamiliar with reporting requirements and payment deadlines.

This fictional scenario highlights some common pitfalls when dealing with an estate and how to avoid paying more tax than necessary. This demonstrates just some of the benefits that can be achieved if these common pitfalls are avoided, which in this case includes:

• Saving Inheritance Tax (IHT) by claiming Business Property Relief (BPR), the Residential Nil Rate Band (RNRB), the transferrable Nil Rate Band (TNRB), the Transferrable RNRB and relief for lifetime gifts out of surplus income.

• Making distributions in the most tax efficient manner saving Capital Gains Tax (CGT) and Income Tax. 

• Saving further IHT by making a loss relief claim during the administration period of the estate.

Scenario background 

Ray Green was originally from Australia and he had lived and worked in the UK for over 40 years. He was a devoted family man with three children and five grandchildren. Ray was generous and he’d been making gifts to his children and grandchildren during his lifetime. He was a keen amateur investor and enjoyed dabbling in the investment market.

Ray’s wife sadly died of cancer five years before him, which led to him leaving a donation to Cancer Research in his will. His children were the executors and the beneficiaries of his will. 

The executors planned on dealing with the administration of their father’s estate themselves, which appeared to be straight forward. However, nearly a year after their father died, they needed  assistance because the process was far more complex than it originally seemed.

Common pitfalls and how we can help

Missing deadlines

Executors are often unaware of the deadline for submitting the IHT Account to HMRC. Our experts would inform Ray Green’s executors that they had just one year to file and would assist with the completion of the IHT forms, as well as the probate application. 

To start, we’d look at the value of assets less liabilities of Ray’s estate, based on the information provided by the executors. We’d also calculate how much of Ray’s Nil Rate Band (NRB) he’d used up by making gifts to his children and grandchildren (who were born and lived in UK all their lives) during his lifetime and calculate the IHT liability, which in this scenario would be £598,000.

Being unaware of exemptions that apply to gifts

As part of our probate advice, we’d enquire into the gifts that Ray made in the seven years before he died and review his financial situation, ascertaining whether the gifts were either covered by his annual exemptions (£3,000) or were gifts out of surplus income. In this scenario it would mean that instead of his available NRB reducing by approximately £230,000 (being the total gifts during the seven years before death) only £50,000 of the gifts would reduce his NRB, resulting in a saving of £72,000 in IHT (at the rate of 40%). 

Overlooking available tax relief 

Executors are often not aware that they’re able to claim the predeceased spouse’s NRB. In Ray Green’s case we’d review his wife’s estate and, in this scenario, Mrs Green hadn’t used any of her NRB when she died, everything had passed to Ray under the spouse exemption. This meant there was an additional £325,000 NRB to reduce the IHT liability by £130,000.

Where there’s a property in the estate, we review whether the RNRB relief criteria are met. In this scenario, as the criteria were met, it meant the executors could claim the RNRB (£175,000) for Ray. As Mrs Green died before 6 April 2017, she could not have used her RNRB either, but the executors could claim the Transferable RNRB as well (another £175,000). As a result of our advice, the executors/beneficiaries would benefit from a further IHT saving of £140,000.

We also review any charitable donations and, in this scenario, Ray’s will left almost 10% of his entire estate to Cancer Research. We’d advise the executors that by increasing the donation by £15,000 the estate would benefit from the reduced IHT rate of 36%. This would result in a further saving of £59,800 of IHT, so a net benefit to the family of £44,800.

Ray had several investments with a combined value of £100,000 that were listed on the Alternative Investment Market. We’d review these investments and confirm if they qualified for 100% Business Property Relief (BPR), which in this case saved the executors £40,000 of IHT.

The executors sold the portfolio of investments within 12 months of their father’s death to pay part of the IHT liability. Unfortunately, the investment markets had fallen during the year. In this scenario, we’d review the gains and losses on all the sales of the quoted equity investments, including those in his ISA which are subject to IHT, and advise the executors to make a loss relief claim. This would save £23,600 of IHT.

Missing potential Inheritance Tax planning opportunities

As probate and UK tax experts, our team would inform Ray Green’s executors about Quick Succession Relief (QSR) and advise that if any beneficiaries died within five years of Ray’s death, the same assets could be subject to double taxation. In this scenario, it could result in IHT of between £0 and £215,000 being charged on the assets they inherit. This is because the relief ranges from between 100% (if a beneficiary died within a year of the first death) to 20% (if death occurred within five years). However, if the death occurred five years after their father’s death, the whole of their inheritance would be subject to IHT again. This means that their father’s estate could potentially be subject to double taxation as early as 12 months after his death, reducing the estate to be inherited by the beneficiaries’ children (Ray’s grandchildren). 

We’d look for opportunities to reduce the estate’s exposure to this second IHT. If one of the beneficiaries was wealthy and didn’t need the inheritance from their father, we’d highlight the option of using a Deed of Variation, which in this case would have the effect of skipping a generation to reduce the chances of IHT twice on the same assets in a short period of time. If this beneficiary survived only five years after Ray’s death, this would result in an IHT saving of up to £215,000.

As well as the above common pitfalls, we'd also help the executors and beneficiaries with:

• Calculating the CGT liability for the sale of property.

• Filing the CGT return and advising on the payment of the CGT liability within 60 days of completion of the sale.

• Understanding that some beneficiaries had not utilised their full CGT annual exemption and therefore some assets should be transferred in specie to them to sell personally and claim the gain made since Ray’s death against this allowance, in this scenario that saves almost £7,000 in CGT.

• Registering the estate on the Trust Registration Service and following approval, submitting annual tax returns for the estate on the executors’ behalf.

• Preparing statements of income and tax credits for beneficiaries, which in this scenario led to one non-tax-paying beneficiary reclaiming £1,000 of Income Tax paid by the estate.

• Reporting income for the beneficiaries’ inherited assets.

• Tax and financial planning advice for beneficiaries surrounding their inherited assets.

The benefits of seeking probate and estate administration advice

It often comes as a surprise to our clients how many steps are involved in the probate and estate administration process, and Personal Representatives (executors/administrators) are often unaware of the reliefs, exemptions and planning opportunities which can help save thousands of pounds in tax for the estate and often the beneficiaries as well.

Our regulated and insured probate experts work with many clients with scenarios like Ray Green’s. We aim to make the process as simple as possible, while maximising benefits for the beneficiaries at a difficult time. 

We pride ourselves on ensuring that the estate is dealt with correctly to provide peace of mind that there's no complex tax or probate issues left to resolve. Our approach is tailored to the specific circumstances, so we can help with just a few steps, or the full process from start to finish.

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