Practical advice for non-professionals acting as executors of wills.
Around 12,000 estates are liable to IHT each year, with a family member or friend often acting as lay executor. What these executors may not realise is that they are personally liable for ensuring that the correct amount of IHT is paid on the deceased's estate.
The news that HMRC is expected to look more closely at IHT payments as part of its wider crackdown on tax evasion and avoidance means the need for accuracy has never been more important. Any errors could leave executors open to investigation – on this matter and in relation to their own tax affairs.
Know your role
The executor administers the deceased's estate in accordance with the will. This means identifying all assets, paying any debts and distributing what is left to the beneficiaries.
If the estate – that is the value of the individual's entire assets including cash, possessions, property and any investments minus any debts – exceeds the 'nil-rate band', the executor is responsible for submitting a full IHT return to HMRC. Where no IHT is due, the estate is usually referred to as an 'excepted estate' and a simpler form can be submitted to the tax authorities. But, in some cases, depending on what is in the estate and the amount of past gifts, a full IHT return may be needed even where there is no IHT liability.
Establish what's in the estate
The first step is to go through the deceased's files to find key items such as the will and bank statements. If you can't find a will, it's worth contacting the deceased's solicitor or bank. Banks routinely keep wills in safe custody for clients. If the deceased did not make regular use of a solicitor, then the next port of call should be the law firm that advised the deceased on the purchase or sale of a home or perhaps a divorce.
Bank statements are invaluable as they reveal standing orders, direct debits and sources of income, which may indicate life insurance policies or similar. These will need to be traced in order to determine their value. A copy of a previous tax return, if prepared, will also be helpful, as it should highlight all income-producing assets and any interest in trusts. Any shared interest in a property will count towards the value of the estate.
Value the estate accurately
HMRC looks at valuations carefully, so make sure you can justify your figures. It is always best to obtain independent professional valuations for residential and commercial property, unquoted shares and more esoteric investments like jewellery, antiques and classic cars.
Certainly any assets thought to be worth more than £500 must be properly valued, which typically means sourcing professional, written valuations.
A local surveyor who is a member of the Royal Institution of Chartered Surveyors should carry out any property valuations. For furniture and general possessions, speak to a local auctioneer and ask for an itemised assessment. For equities, bonds and other investments, contact the investment manager for valuations at date of death (referred to as quarter-up values). Similarly, request statements for bank accounts showing balances at the date of death and ask the bank to calculate the accrued interest.
Add up any unpaid utility bills, credit card accounts, outstanding mortgages and so on, without forgetting local newsagents, carers and similar. If you, as the executor, settle any of these outstanding bills before receiving Grant of Probate, make sure you get a signed receipt.
Liabilities outstanding at the date of death and funeral expenses can be claimed against the value of the assets, subsequently reducing the IHT liability.
Take account of gifts
Any gifts made in the seven years prior to death also need to be taken into account and must be itemised on the tax return. Remember though, individuals can make £3,000 worth of gifts per year plus £250 to any number of individuals, which all fall outside the IHT net. There are also other allowances, such as gifts in contemplation of marriage.
Ideally, the deceased or a close family member will have kept a record of such gifts. In any case, you will need to verify details, so check bank statements and cheque stubs to see what gifts appear to have been made in the last seven years. If the deceased had an accountant or a solicitor, they may have helpful information on gifts made during the deceased's lifetime.
Best practice
It is good practice for executors to prepare a statement showing the assets of the estate minus liabilities, and how the balance has been distributed. In fact, it may be worthwhile getting IHT clearance from HMRC before distributing the estate. If you are appointed executor of an estate, consider taking professional advice.
To make it easier for your own executors, let them know where your will is located, maintain a list of gifts that they will need to take into account, and keep your papers and other relevant details in an orderly manner.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
