The importance of Executors seeking advice
Mr Jones, a bachelor, died in August 2018, having made a Will appointing his close friend Gill as sole Executrix. His estate was worth £600,000, and comprised mainly of bank accounts and a property owned in his sole name. After the payment of a charitable legacy of 10% of the total value of the estate, the residue was to be gifted to his son Keith absolutely. Gill, who was very distraught at the loss of Mr Jones, started to administer the estate without first taking legal advice.
Gill had a basic knowledge of Inheritance Tax and the Nil Rate Band of £325,000, and therefore calculated that Inheritance Tax on the additional £275,000 at the rate of 40%, being £110,000, was due. Gill distributed Mr Jones’ estate without having first discharged the Inheritance Tax liability, something which Keith had promised to deal with. However, Keith moved abroad and Gill had no success in tracking him down, and HMRC then looked to her as Executor to pay the liability, something which most lay Executors do not necessarily realise that they are personally liable for.
Gill also mistakenly did not declare income on the estate. Whilst she did not have a malicious intention by not declaring this, she was held liable for both the income tax due on the estate and the fine from HMRC
Lessons to be learned
Seeking specialist legal advice when taking up Executorship of Mr Jones’ Will would have ensured that Gill would have been certain to pay the Inheritance Tax, together with any other liabilities, before distributing to Keith , as she would have been aware of the personal liability she incurred by accepting her appointment. She would also have been aware of the requirement to submit details of income received during the administration period to HMRC and to pay any Income Tax due as a result.
Legal advisors would also comment on the availability of the Residence Nil Rate Band, and the estate would have therefore benefitted from a further £125,000 of allowances to offset against any Inheritance Tax. Also, as there was a charitable gift of 10%, the Inheritance Tax rate would have been 36% rather than 40%. Gifts to charities are also exempt from Inheritance Tax. This would have made the total Inheritance Tax payable as £32,400. However, as Gill did not claim any of these allowances, it was not available to her and she therefore would have overpaid Tax by nearly £78,000.
It is worth noting that the obligations that come with administering estates are not to be taken lightly, and proper legal advice should be taken to ensure that Executors do not find themselves subject to any pitfalls that they were not aware of.