Probate - A Guide

This guide is intended as an introduction to probate and estate administration, i.e. the steps that need to be taken to deal with a person’s assets and affairs after he or she has died.

You should read in particular the sections on time limits and tax issues later on in this guide.

What happens to a person’s property and assets (often referred to as the person’s ‘estate’) when they die and the steps that need to be taken depends on a number of factors.

1. Is there a will?

If there is a will the estate will usually be dealt with by the person named as the executor in the will. The executor’s job is to gather in the assets of the deceased, to pay any tax and other debts and liabilities left by the deceased, and distribute the balance in accordance with the terms of the will. The executor will usually need to obtain a grant of probate to deal with the estate. This is explained below in the section on procedure.

If there is no will then the estate will be distributed amongst the deceased’s relatives in accordance with a set of rules called the intestacy rules. Who gets what depends on the size of the estate and which relatives survive the deceased. The estate will be dealt with by an administrator who will usually be one of the relatives entitled under the intestacy rules. Their role is very similar to that of an executor. The administrator will gather in the assets of the deceased and pay any tax and other liabilities and distribute the balance in accordance with the intestacy rules. An administrator will usually need to obtain letters of administration to deal with the estate. This is explained below in the section on procedure.

Executors or administrators are often referred to as the deceased’s ‘personal representatives’ or ‘PRs’ for short. The grant of probate or letters of administration is often referred to as the ‘grant of representation’.

There is no general rule preventing a beneficiary under the will or the intestacy rules from being a PR.

2. Did the deceased own assets jointly with anyone else?

Jointly held assets - such as bank accounts, shares and land and buildings - usually pass to the surviving owner automatically by operation of law regardless of what the will or the intestacy rules might say. The production of the death certificate is often all that is usually needed for the legal ownership to pass to the survivor. The PRs do not need to be involved in the transfer as no grant of representation needs to be produced.

One exception to this rule is where houses and land are held jointly but as ‘tenants in common’ so that they do not pass automatically to the survivor on death. The deeds to any land or houses will need to be checked to see in what way the property is held.

3. Are any assets held in trust?

Generally assets held in trust will pass in accordance with the terms of the trust and not under the will or intestacy rules.

Trusts are sometimes set up to hold the death benefits payable under income and pension policies. This may be advantageous as the trustees can obtain the policy proceeds without waiting for or producing a grant of representation. In addition, assets can sometimes be sheltered from inheritance tax through trusts.

4. What about debts left by the deceased?

One of the tasks of the PRs is to pay any outstanding debts from any money or property left by the deceased. If the deceased’s debts are greater than the assets they leave the estate will be insolvent and the creditors will not be paid in full. The situation is similar to a bankruptcy. The outstanding debts will be paid in accordance with a strict set of rules governing their priority. A PR would be well advised to check if an estate will be solvent before agreeing to act.

Procedure
  1. Whether the deceased left a will or not, the first step in administering the estate is to establish what assets and liabilities the deceased left. This can be a simple task if the estate is modest, or it can take a lot of time if the estate is large or complex or if the deceased's records are lost or in a mess.
     
  2. If the estate is small, there is no inheritance tax to pay, and if any particular asset does not exceed £5,000 (and in some cases more), then usually banks, building societies and other institutions will pay the sum to the appropriate person if they sign a document to say they are entitled to the money.
     
  3. If the estate consists entirely of joint property, all that may be needed is for copies of the death certificate to be produced to transfer the property to the surviving owner. However it still might be necessary for an inheritance tax return to be submitted (see below).
     
  4. Otherwise, in order to get access to the assets in the deceased’s estate and transfer them to the beneficiaries, the PRs will need to obtain a grant of probate or letters of administration (i.e. the grant of representation).
    The grant of representation is an order of the court which states that an individual has died and names the executors or administrators who will be dealing with the estate. It is proof of the PRs' authority to take over the deceased's assets and deal with the estate. Copies of the grant will then be produced by the PRs to enable the assets to be sold or transferred.
     
  5. The PRs will sign a statement of truth giving details of themselves and the deceased and confirming the gross and net values of the deceased’s estate. The statement will then be submitted to the Probate Registry with the will (if there is one).
    A grant of representation is obtained from a Probate Registry. It normally takes about two weeks for the application to be processed.
     
  6. A grant of representation will only be issued once the PRs have the details of all the assets and liabilities in the estate and, if required, submitted a full inventory of the estate (the ‘inheritance tax return’) and paid any inheritance tax due. Inheritance tax returns can either be short (IHT205) or long (IHT400).
     
  7. What type of inheritance tax return is necessary largely depends on the size of the gross estate including the deceased’s share of joint property. Usually the larger inheritance tax return is only necessary if the gross estate is over the nil rate band available at the time, but it may be necessary in certain other circumstances regardless of the size of the estate (e.g. if the deceased was the beneficiary of a trust or was domiciled abroad, or if the deceased leaves a large estate exempt from tax to their surviving spouse).
     
  8. Paying the inheritance tax before the grant of representation is issued can cause problems. The difficulty is that without the grant the PRs cannot generally get access to the assets in the deceased’s estate to raise the money to pay the tax. However, banks and building societies are usually willing to release funds before the grant of representation is issued in order to pay inheritance tax. If all else fails, the PRs may need to arrange a short-term loan or dig into their own pockets. Please note that Stone King has an arrangement with its bankers for short-term tax loans on favourable terms to its clients in probate cases.
     
  9. Once the grant of representation is issued the PRs can begin the task of winding up the estate. They will have to gather in all the deceased's assets and settle the deceased’s debts and the expenses of administering the estate. They will have to settle all tax matters (including all inheritance tax and also income tax and capital gains tax they are liable to pay as PRs on income and gains arising while they administer the estate). They will have to pay all legacies of cash or other assets specified in the will and finally distribute the residue of the estate (i.e. everything that is left after all legacies and costs have been paid) to the beneficiaries.
     
  10. The executors will often prepare a set of estate accounts for the beneficiaries at the end of the day to show how their shares of the estate are made up. The estate will be said to have been wound up, and the administration of it completed, once all assets and liabilities have been accounted for, and the net estate paid out to the beneficiaries.
Timing

The administration of an estate can often be a straightforward process but sometimes it can be extremely complex and time consuming. It is often very difficult at the outset to predict how long it may take. Factors which can influence how long an administration takes are:

  1. Having to hunt for details of the assets and liabilities in the estate.
  2. Tracing family members who will inherit under the intestacy rules or beneficiaries under a will.
  3. Dealing with assets held abroad.
  4. Settling tax liabilities. The PRs have to settle the deceased’s own tax affairs to the date of death as well as any inheritance tax and any income tax and capital gains tax arising during the administration of the estate.
  5. Agreeing values of assets with H M Revenue & Customs for inheritance tax purposes. This can be a particular problem in relation to land and buildings and also businesses and unquoted shares.
  6. Selling assets such as land or houses.
  7. Dealing with disputes over the will or the application of the intestacy rules.
  8. Dealing with creditors. The role of the PR is quite onerous and in some circumstances they can be held personally liable for claims against the estate. To protect the PRs, once the grant is issued it is usual to advertise for claimants against the estate. Claimants must be given a minimum of two months’ notice to come forward. This can delay distribution to the beneficiaries.
  9. Dealing with claims by family and dependants - in some circumstances certain close relatives, partners, or people who were financially dependent on the deceased have a statutory right to make claims against the estate for reasonable financial provision. The statute concerned is the Inheritance (Provision for Family and Dependants) Act 1975. Potential claimants have six months from the grant of representation to make a claim and a PR may decide not to distribute the estate until that period has elapsed.
Time limits

A question which is often asked concerns the time limits applying to PRs. Generally PRs are entitled to take as long as they need to do their job properly. In some cases the estate can be wound up within a matter of months. In some rare cases, for very good reasons it can take years to complete the administration of an estate. However, PRs need to be aware of the key time limits which are:

  1. If inheritance tax is not paid by the end of six months after the end of the month in which the death occurred, interest is payable on the unpaid balance at a statutory rate which is currently 3%.
  2. If cash legacies are not paid for 12 months after the death, interest is payable on the legacies after that at a statutory rate.
  3. If a statutory notice for creditors is posted, the PRs must leave two months after it for creditors to come forward.
  4. A claim for provision from the estate under the 1975 Family Provision Act can be made within six months after the date of the grant of representation.
  5. Any post-death variation of the distribution of a person’s estate has to be made within two years after death if the relevant inheritance tax and capital gains tax exemptions are to apply.
  6. If stocks and shares are sold within 12 months after the death at an overall loss against the value at the date of death, the PRs can claim the lower value for inheritance tax purposes.
  7. If land and buildings are sold within four years after the death at a loss against the value at the date of death, the PRs can claim the lower value for inheritance tax purposes.
  8. Penalties can be charged by H M Revenue & Customs if any inheritance tax returns are not submitted within twelve months after death, and if there are any delays in submitting income tax returns.
Tax issues

The following is a basic summary of the general tax considerations. It is essential that PRs should obtain specific advice on how the tax rules apply to them.

1. Income tax and capital gains tax to date of death

The PRs should notify the deceased’s tax office of his death and ensure that any required tax returns due to the date of death are completed.

The PRs should ultimately obtain clearance from H M Revenue & Customs that the deceased’s tax affairs to the date of death are settled.

2. Income tax and capital gains tax after death

The PRs are responsible for paying tax on any income and capital gains arising during the course of the administration of the estate. That means the period from the date of death until they have finally wound up the estate by paying everything to the beneficiaries.

Gains on a sale by the executors will be assessed in relation to the value of the assets at the date of death. The PRs can claim various exemptions and expenses against the tax.

As a body, the PRs have one annual capital gains tax exemption between them. If an asset has gained in value since the deceased’s death, the PRs should consider passing it on to the beneficiates to sell. The beneficiaries will have their own individual exemptions, and may have a lower rate of tax to pay than the executors.

The PRs will be responsible for filing any required tax returns during the administration of the estate. Penalties can apply if returns are filed, or tax paid, late.

Before completing the winding up of the estate, the PRs should obtain clearance from the Inland Revenue that their income and capital gains tax affairs during the administration of the estate are settled.

3. Inheritance tax

Reference should be made to the Stone King factsheet on inheritance tax setting out the general rules.

Inheritance tax applies to assets owned at death and also lifetime gifts made within seven years before death. The following are the main issues for the PRs to consider:

  • The PRs should establish what sort of inheritance tax return needs to be filed. They should ensure that they make the necessary enquiries and obtain the necessary valuations (e.g. of houses and chattels) to complete it properly.
     
  • The PRs should establish if any inheritance tax is payable on the estate. They should take into account any relevant exemptions (e.g. for gifts to spouses or charities) and reliefs (e.g. for business and agricultural assets). They should make full enquiries regarding gifts made in the years before the deceased’s death.
     
  • The PRs should establish what inheritance tax needs to be paid on applying for the grant of representation. They should consider whether to elect to pay the inheritance tax by instalments which are available on certain assets. There may be cash flow advantages – the first instalment does not necessarily have to be paid on the application for the grant of representation but only after the end of six months after the end of the month in which the death occurred.
     
  • The PRs should bear in mind that interest runs on unpaid tax after the end of six months after the end of the month in which the death occurred. They may decide to lodge money to prevent interest running. But the current rate of interest is only 3%.
     
  • If stocks and shares are sold within 12 months after death, or if land and buildings are sold within four years after death, at a loss against the date of death value, the PRs should claim the lower value for inheritance tax purposes.
     
  • If the PRs elect to pay inheritance tax on a house or a business by instalments and later sell it, they will immediately have to pay all the remaining instalments due.
     
  • The PRs will need to identify and report any changes in or additions to the assets and liabilities notified in the original inheritance tax return.
     
  • The PRs should bear in mind the inheritance tax advantages for beneficiaries of a deed of variation (also called a deed of family arrangement). This is a deed which varies the distribution of joint assets or the distribution of an estate under a will or on intestacy. If completed within two years of the death and drafted appropriately, the variation will for inheritance tax and capital gains tax purposes be treated as made by the deceased on his death. It will not be read back for income tax purposes however.
     
  • Although currently deeds of this kind are allowed, it is thought by some commentators every year this law could change in the next budget. Deeds like this can be used to save lots of tax and are an obvious ‘loophole’.
     
  • The PRs should ensure that all inheritance tax liabilities are provided for at all stages during the administration of the estate. Before completing the administration they should obtain a final inheritance tax clearance certificate
How Stone King can help

Dealing with a person’s estate can sometimes be daunting. The PRs often have to cope with the loss of a relative or friend at the same time as having to deal with the estate. The estate may also be complex and the PRs may not be able to deal with it without help. Many people prefer to pass the responsibility for dealing with the estate to a solicitor. The solicitor may be involved because he or she acted for the deceased, or is asked by the PRs to deal with the estate on their behalf, or is named as an executor in the will.

At Stone King we aim to offer a sympathetic, efficient and cost effective service. We are happy to be involved in dealing with certain aspects of the procedure only in appropriate cases.

Many solicitors charge for probate work on a percentage of the estate. However, our charges in probate matters are usually based simply on the amount of time it takes us to deal with the administration of the estate rather than being based on a percentage of the value of the estate. If the estate is straightforward, or if there is less involvement on our part, our charges will be obviously less than if the estate is complex and we are heavily involved. We let PRs have a written estimate of our costs and a note of our hourly rates when we are instructed or alternatively we can provide a fixed fee for peace of mind.

The law and practice referred to in this article has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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