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Some of the complexities with probate and estate admin

New rules on cost transparency to potential clients were introduced by the Solicitors Regulation Authority on 6 December.

The SRA now requires that clear information on pricing and service level covering seven different areas of business; from residential conveyancing to licensing must be displayed on all firms’ websites.

Probate/Estate administration

Among the seven is uncontested probate, which in most cases means estate administration. As we now publish a range of costs, the basis of charges, likely disbursements, and what is or is not included in the fee estimate, it’s timely to identify some of the elements that can make more complex this specialised area of work where Irwin Mitchell Private Wealth has market-leading expertise.

In this area, the requirement comes at a time when costs are rising; however not due to legal fees, but to a new government tax planned to take effect in April 2019 – the raising of probate fees to a level far above the costs of the service. The current fee of £155 (for those applying through a solicitor) will rise to between £250 (estates from £50,000 to £300,000) to £6,000 (estates above £2m). The detailed advance disclosure to clients of the source of likely disbursements is therefore welcome.

We can simply do the work to apply for a grant of probate, but in most cases we take responsibility for administering the whole estate, so what does it involve?

At a simple level, there are two main parts, but each of them may involve a lot of detailed technical and sometimes complex administrative, work.

First, we have to gather information to complete an account for Inheritance Tax (IHT), with the documents needed to seek a grant. As the Office of Tax Simplification has already highlighted, even where there may be no liability for IHT, the current process means a potentially long drawn-out investigation and completion of paperwork before any grant of probate can be considered.

Several traps now emerge. Valuing a property, whether it is to be retained by a beneficiary or a trust, or sold, is often difficult with elements that can be overlooked presenting issues with HMRC. There might, for instance, be “hope value” in the potential development of the property or grounds. Valuing a business or farm is a specialised matter; the questions asked of the accountant can be crucial, and members of the family with different interests can make the process complicated.

For instance, when it comes to personal chattels, is a valuation needed or not, if so by whom? Is a more thorough investigation needed of the information required by HMRC, such as the lifetime gifts made by the deceased?

Oversight will be treated as non-disclosure and can lead to interest and penalties being applied.

Then there is the tax overview, to ensure that all available IHT reliefs and exemptions are claimed, including transferable allowances from deceased spouses.

Once probate has been granted, we usually move on to the second part - administering the estate in accordance with the Will or intestacy.

The task is not simply an unthinking rush to sell everything, as soon as possible after probate, because there are some crucial elements to consider.

Does the estate include particular assets which any beneficiaries may wish to have as part of their inheritance? If so, executors normally have power to respond by allocating such assets – such as shares or an interest in a property - to one beneficiary or trust towards settlement of their legacy or portion of an estate, but they must do so at a fair new value.

This is known as appropriation, and it can also be invaluable for tax mitigation as it can help reduce the Capital Gains Tax otherwise payable on any capital gains in an estate. The tax payable can also be reduced through the maximisation of ‘loss relief’, for IHT, so planning is important where there are gains and losses on shares or an investment property.

Sometimes a beneficiary will want to buy the family home or business/farm, and there are many issues to consider in valuing and transferring any assets of this nature.

The new relief for homes left to descendants, the Residence Nil Rate Band, can open up real new opportunities to save IHT, but often action is needed with the terms of the Will or trust, or how the property is owned, to maximise the benefits.

A key task in the administration is the checking of all IHT calculations and ensuring that all reliefs and exemptions are applied, against a background of a changing tax landscape.

As cash is collected in, where estates have assets that can be liquidated, it’s important to consider making interim cash distributions, while keeping enough back to cover expenses and tax.

Another key duty of executors is to give residuary beneficiaries proper information about the tax treatment of their share of an estate, including the income and capital, and the details they need to show on their personal tax returns. Accounts that seem straightforward can easily become more complicated in practice, highlighting the need for specialist tax expertise.

This highlights the importance of accurate reporting of the estate’s income and gains, and of registering the estate on HMRC’s Trust and Estate Register where needed.

Published: 11 December 2019

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December 2018

Key Contact

Catherine Angel