Administration: Post-grant practice

Question 1

When do PRs have evidence of authority to collect in and administer estate?

Answer 1

After obtaining grant of representation

Question 2

What is the method of collection for each type of asset? Bank account balance, actual property, investments, land?

For collecting in assets stage

Answer 2

• Balance of bank accounts = banks/building societies will require withdrawal forms to be completed
• Actual property (e.g. jewellery) = collected, stored and safeguardeed
• Investments = sale/transfer can be arranged by financial advisor
• Land = can be transferred into name of PRs if not being directly transferred to B

Question 3

Where should money collected in be paid into?

Answer 3

Either:

1. PR’s bank account (opened specifically to hold estate money and to prevent mixture with personal funds); or
2. Law firm client account (Solicitors’ Accounts)

Question 4

When should PRs begin to pay deceased’s outstanding debts and when should they be paid?

Answer 4

• Can begin to pay as soon as assets can be collected in
• Duty to pay debts with ‘due diligence’ (normally before end of executor’s year)

Question 5

What will PRs be liable for if they fail to pay debts even though there are assets available?

Answer 5

Liable to creditor and any B for consequential loss (e.g. cost of proceedings incurred by creditor to recover debt)

Question 6

Can an express clause limit PR liability to Bs and creditors?

Answer 6

Can limit liability to Bs but not creditors

Question 7

How can PRs obtain protection against unknown creditors?

Answer 7

By complying with s27 notice procedure

Question 8

What must be repaid ASAP to minimise expense of interest payments?

Answer 8

Any pre-grant loan PRs took out to pay IHT

Question 9

What is a ‘first proceeds’ undertaking?

Answer 9

Given to a bank in connection with a loan; PRs promise to use first moneys raised during administration to repay loan

Failure to comply = breach

Question 10

What general administration expenses should be paid as and when they arise during administration?

Answer 10

• Cost of valuing estate assets
• Probate fees
• S27 notice costs
• Professional legal fees for services provided to estate

Question 11

Which of the deceased’s property is available for the payment of debts and liabilities? What about clauses to the contrary?

Answer 11

All of deceased’s property

Any clause to the contrary is void

Question 12

How will the rules determining the order in which estate assets are used to pay debts and liabilities differ?

Answer 12

Rules differ depending on:

• Whether estate is solvent or insolvent
• Debts are secured or unsecured

Question 13

What is a solvent and insolvent estate? How do the rules re what assets are used differ for each?

Answer 13

Solvent = assets sufficient to pay all funeral, testamentary and administration expenses, debts (secured and unsecured) and liabilities

• Chronological order in which debts are met is not a primary concern as credit will be available anyway (but is a statutory order re application of assets towards payment of unsecured debts and administrative expenses)

Insolvent = assets insufficient

• Debts must be paid in statutory order

Question 14

Does it matter whether legacies can be paid or not when considering which assets to pay debts/liabilities with?

Answer 14

No!

Question 15

For secured debts, which assets are used?

E.g. a mortgage on deceased’s house

Answer 15

The charged property will bear primary liability for payment of the debt secured against it unless contrary intention shown in will (s35 AEA)

Contary intention = other assets used

Question 16

What are the consequences if outstanding loan is less than or greater than the value of asset secured?

Answer 16

• Less than value of asset secured = no other estate assets can be used to repay secured debt (i.e. house will be received with the mortgage!)
• Greater than value of asset secured = creditor usually ranks as unsecured creditor

Less = bad = have to receive house with. mortgage and maybe sell it :(

E.g. A owns a house, Chez Nous (£250,000) which was charged with a mortgage during A’s lifetime (£30,000 is outstanding). By his will, A gives Chez Nous to B. The will is silent on the liability to repay debts.
The effect of s35 AEA is that B inherits Chez Nous subject to the mortgage and is not entitled to have the mortgage debt discharged from other assets in the estate. B therefore may need to sell Chez Nous to repay this debt.
NB this is in the case without a contrary intention (will usually be one)

Question 17

Why can a solvent estate still affect what Bs will receive if credit will be paid in any event?

Answer 17

The choice of assets used to pay these amounts will affect Bs if their part of estate is used

Question 18

What is the statutory order re application of assets towards payment of unsecured debts and administrative expenses?

I.e. which assets are used

Will apply unless varied by the will

Answer 18

1. Property not disposed of by will (passing by full/partial intestacy) subject to retention for any pecuniary legacies (‘pecuniary legacy fund’)
2. Residue (subject to retention of pecuniary legacy fund if not alr done)
3. Property the will sets aside for repayment of debts
4. £ in the pecuniary legacy fund
5. Property specifically given (chattels)

Never (Not disposed)
Realised (Residue)
Statutory order (Set aside)
Pays in (Pecuniary legacy fund)
Sections (Specific gifts)

By will a testator (T) leaves their estate as follows:

• House to A valued at £210,000
• £10,000 to each of B and C
• Residue to D

T’s assets, excluding the house, are worth £55,000. The debts of the estate are £6,000 and there is a mortgage of £60,000 which remains outstanding following their death. The will is silent as to what part of the estate should bear the debts.

Applying the statutory provisions:

• A receives the house subject to the mortgage (s 35 AEA)

Unsecured debts (£6,000) will be paid in accordance with the statutory order.

• The first relevant category is the residue (subject to the retention of a legacy fund of £20,000 for B and C). Gross estate £55,000 - £20,000 = £35,000 residue.
• Debts are repaid in full from this residue.
• B and C are paid in full from the legacy fund.
• D receives the remaining residue £29,000 (£35,000 - £6,000 for debts)

Question 19

Can categories be used at the same time?

Answer 19

Each category’s assets must be exhausted before moving on to next as required

Question 20

How does the pecuniary legacy fund work?

Answer 20

• Money will be retained for pecuniary legacies (in will) before working down statutory order
• If all parts above are exhausted (property not disposed of, residue, property will sets aside) the fund can be dipped into

Question 21

What happens to the money of the pecuniary legacies that was meant for Bs if it was used?

Answer 21

Their legacies abate (reduce) proportionately according to value

By will a testator (T) leaves her estate as follows:

• £15,000 to B
• £5,000 to C
• Residue to D

T assets are worth £55,000. The debts of the estate are £40,000. The will is silent as to what part of the estate should bear the debts.

Applying the statutory provisions:
Unsecured debts (£40,000) will be paid in accordance with the statutory order

• The first relevant category is the residue (subject to the retention of a legacy fund of £20,000 for B and C).
• Gross estate £55,000 - £20,000 = £35,000 residue. The whole of the residue is used to repay the debts – D inherits nothing
• £5,000 of debts remain outstanding. This amount is paid from the next category (the legacy fund). £20,000 - £5,000 debts, which leaves only £15,000 for B and C.
• The original gifts are of unequal amounts. The burden of the debt is shared between them in proportion to the value of their gift. B’s legacy is reduced by ¾ of the debt and C’s by ¼ of the debt. B gets £15k - £3,750= £11,250. C gets £5k - £1,250 = £3,750

Question 22

What is the difference in the contrary intention required in the case of secured and unsecured debts?

I.e. for will to override statutory order where contrary intention shown

Answer 22

Secured = More than a general direction, a clear/specific intention for the B of secured asset to receive item free of debt

Unsecured = Express wording of a general direction e.g. for residue to bear the burden of debts
“I give my residuary estate to my executors on trust for sale and out of the proceeds of sale to pay my debts …..”

I.e. to amend order property not disposed of > residue > money set aside for payment of debts = need a general direction

To make sure someone receives house free of a mortgage = need a specific intention

Question 23

If PRs take assets ‘out of order’ to pay creditors, what can B - whose assets have been ‘wrongly taken’ - use? Are creditors under an obligation to return money given to them?

Answer 23

• Bs can use the doctrine of marshalling
• Creditors not bound by rules (do not have to return money)

Question 24

What does marshalling allow a B, whose inheritance has been reduced, to do?

Answer 24

If the assets to which he was entitled have been wrongly used to pay a creditor, B can compensate himself by going against property which ought to have been used to pay debts

So disappointed B could claim against assets inherited by another B if those assets should have been used to repay debts

Question 25

If there is insufficient **cash** in the category being used, what can the PRs do?

Answer 25

Use general power of sale over whole of estate to sell the non-cash assets (to produce cash!)

Question 26

What should be considered when the PRs have a choice about which assets to sell?

Answer 26

1. CGT implications 2. How easily or quickly a sale can be carried out (e.g. quoted shares can be sold faster than unquoted shares) 3. Wishes of Bs

Question 27

For CGT purposes, what value do Bs take assets at when they are transferred?

Answer 27

Probate value

Question 28

What should be borne in mind re CGT when deciding what assets to sell? | I.e. how to avoid CGT

Answer 28

If PRs sell assets that have risen in value since death, the profit they make is subject to CGT, so... * Should sell assets which have not risen in value or are rapidly falling in value (to preserve estate value) * Should reserve assets that have risen in value to transfer to Bs (will not be treated as disposal!) ## Footnote E.g. PRs need to raise cash by selling an item from residue and may choose: * Car (probate value £4,000, current value £4,0000) * Painting (probate value £10,000, current value £25,000) **The PRs should sell the car to raise cash and retain the painting to be transferred to a residuary beneficiary.**

Question 29

Are PRs bound to comply with the wishes of a B re what assets they sell to raise cash?

Answer 29

No - but should take into account when reaching decision (i.e. avoid selling where possible)

Question 30

What are the PR's responsibility re the deceased's income tax (IT) and CGT?

Answer 30

1. Finalise deceased's IT and CGT position for **tax year of death** 2. Pay IT and CGT that becomes due during **administration period** (taxable gains made following disposal of estate assets and IT on income received during administration period)

Question 31

How and when do PRs notify HMRC of IT/CGT owed by deceased or any refunds they are entitled to?

Answer 31

Record information and notify HMRC by submitting tax return on behalf of D for period 6 April to date of death

Question 32

What kind of expense are IT and CGT liabilities and from where are they payable?

Answer 32

* Are an estate expense * Payable from estate assets Will be deductible when valuing taxable estate/included if refunds due

Question 33

What must PRs differentiate between re IT and CGT liability?

Answer 33

The **deceased's** income and gains and **estate's** income and gains | Differen rates and reliefs apply

Question 34

Which income of the deceased must the PRs account for?

Answer 34

* Untaxed income due and paid **before death** * Some income paid **after** death which relates to period before death (e.g. rent on properties deceased let but which had not been paid)

Question 35

What will bank interest be taxed as? | I.e. who

Answer 35

* Paid before death = taxed as deceased's * Paid after death = taxed as PR's (even if it relates to a period prior to death)

Question 36

To what assets will the deceased's CGT liability relate?

Answer 36

Assets that the deceased no longer owned on day they died! | Obviously

Question 37

Is death a disposal for CGT purposes?

Answer 37

No! On death, the base cost (what D paid for it) of asset is **'up-lifted'** to date of death value = gains made in lifetime are wiped out! | The tax free uplift

Question 38

What income is taxed as estate income in the hands of the PRs? | Arisen between date of death and distribution

Answer 38

Income that estate assets have generated between date of death and distribution ## Footnote E.g. interest re bank accounts, dividends re shares, rent re let properties

Question 39

At what rate will PRs pay the IT?

Answer 39

At the basic rate (% depends on type of income)

Question 40

How will income generated by the assets **after** they have been distributed be taxed?

Answer 40

As B's income

Question 41

When will HMRC not require any reporting of estate income?

Answer 41

Where the only source of income is savings interest of less than £500 (so tax due would be less than £100)

Question 42

When estate income is distirbuted to Bs, what happens if the B 1. does not pay IT or 2. are higher additional rate taxpayers? ## Footnote I.e. PRs give Form R185 to Bs when estate income is distributed which records the IT paid by PRs in respect of income a B receives

Answer 42

1. Can claim a tax refund 2. Will need to make a top up payment to HMRC when completing tax return

Question 43

When will PRs pay CGT on gains from the estate?

Answer 43

When they make a disposal of estate assets during administration which have increased in value since the date of death

Question 44

Can PRs claim tax free allowance like an individual for both IT and CGT?

Answer 44

Not both - only CGT

Question 45

If assets have fallen in value since the date of death, and they sell these assets, what can PRs do?

Answer 45

The amount of loss can be off-set against other gains made during administration ## Footnote E.g. if the PRs make a gain of £26,000 on the sale of one asset and a loss of £2,000 on the sale of another the overall net gain chargeable to CGT is £24,000.

Question 46

Will gains made by D during lifetime be taxed if they still own at date of death? | I.e. has increased from first bought to date of death

Answer 46

No! Recall tax free uplift; only post-death gains are chargeable

Question 47

Why will PRs not have to worry about CGT when selling chattels?

Answer 47

If a gain made on disposal of a chattel is for consideration of £6,000 or less, it is exempt from CGT

Question 48

Are PRs free to decide whether to sell an asset to raise cash or transfer an asset directly to B?

Answer 48

Yes subject to any specific obligations - CGT implications should also always be considered

Question 49

How can PRs make a sale (as part of administration) or transfer of an asset (to B to sell it) more tax efficeint?

Answer 49

* *B has no tax-free allowance/would otherwise pay at higher rate* = PR should **sell** assets and use estate tax-free allowance and distribute cash to Bs * *PRs have used tax free allowance but B has not* = PR should **transfer** asset to B and B can make gain ## Footnote If the sale of an asset will generate a loss - PRs should consider whether the estate or the beneficiary has gains against which to set off the loss.

Question 50

Can PRs claim main residence relief? Can a B?

Answer 50

* PRs cannot claim * B can claim once they sell it later after satisfying criteria for it

Question 51

What should PRs distribute first? | Once collected in assets, paid funeral, test, admin expenses...

Answer 51

Payment of legacies rather than residuary legacy (as not possible to identify value of residuary gift until administration complete; should be final step)

Question 52

When can PRs make interim distributions of residuary B's share? | And the balancing payment at end of administration

Answer 52

Where they are confident that sufficient assets will remain in control to meet outstanding payments later

Question 53

What should the general considerations of PRs be to ensure they fulfil duty to accurately distribute estate?

Answer 53

* Identity of Bs (review will properly) * Nature of interest (whether vested or contingent, what share entitletd to) * Property to which they are entitled (which items fall in general gift/collection) *

Question 54

What is the method of transfer for chattels, pecuniary legacies, shares, and land at distribution?

Answer 54

* Chattels = deliver to B * £ legacies = cheque/bank transfer * Shares = stock transfer form * Land = assent for a legal estate in land (AS1)

Question 55

Who will bear cost of transfer of asset?

Answer 55

B save for specific provision in will

Question 56

When should PRs distribute if 1. they anticipate an IPFDA claim to be brought or 2. they have put out a s27 notice?

Answer 56

1. Delay by 10 months (6 months to issue claim and 4 months to serve notice) 2. Do not distribute until after 2 month deadline for being notified by claims

Question 57

In what order should legacies be paid generally?

Answer 57

1. Pecuniary 2. General 3. Residuary

Question 58

If not possible to pay all legacies, what happens to them?

Answer 58

They will rebate in reverse order, so... * Funds insufficient to pay all other legacies = residuary B takes no benefit * Funds insufficient to pay all specific gifts = general B takes no benefit * Funds sufficient to meet specific gifts but not all general legacies = general Bs take reduced inheritance * Specific gifts take priority ## Footnote Within each category, if not all of the legacies can be paid, they abate (reduce) proportionately

Question 59

What happens where there is no direction as to which particular assets in estate should be used to pay pecuniary/general legacy? e.g. *100 ordinary shares in ICI plc* | Cf specific legacy (my gold ring) - exact item to transfer

Answer 59

Assets will be taken so that general legacies are paid from residue

Question 60

When can PRs ascertain value of residue and what is needed to calculate it?

Answer 60

* Can ascertain when all debts, testamentary expenses and other legacies paid * To calculate: must have final accurate figures for tax liabilities (inc IHT) and other expenses (interest payable on loans, legal fees) ## Footnote If law firm has been involved = money in client account can be used to pay final invoice for fees and balancing figure distributed in accordance with residuary entitlement

Question 61

Re appropriation to B in settlement of their entitlement, what happens when the value of asset at date of appropriation exceeds or is less than their entitlement?

Answer 61

Screenshot included because this has been covered already and i am tired

Question 62

Example of appropriating a house

Answer 62

Question 63

What should PRs obtain from B when making a distribution?

Answer 63

Confirmation of receipt

Question 64

What options does a PR have where a minor B has a vested interest but cannot give good receipt?

Answer 64

* Express clause in will giving PRs power to accept receipt from 16-17 (but no younger!) * Parent/guardian provides receipt * PRs hold gift property until child 18 * Appoint Ts to hold property for minor and make payment to T * Pay legacy into court

Question 65

What duty to PRs have regarding accounts? What will signing indicate

Answer 65

* Must keep account (record) of estate assets - signed and approved by both PRs and residuary Bs * Signing indicates agreement with how estate administered and residue calculated

Question 66

What 3 components usually make up the estate accounts and what is the purpose for each?

Answer 66

1. Capital account = sets out estate assets and liabilities at death 2. Income account = sets out income received re estate assets during administration and how it was spent 3. Distribution account = sets out residuary B's entitlement

Question 67

What will a capital account record?

Answer 67

What has happened to each item during administration e.g. sold/transferred to B + liabilities like legacies and solicitor's fees

Question 68

What are income expenses shown as on the income account?

Answer 68

Will be deducted as income liabilities

Question 69

How would rent from tenant of an estate property be shown in the income account?

Answer 69

* Income shown in income account * Income tax payable would be shown as income liability

Question 70

What distributions will be shown on the distribution account? What does the final balance show?

Answer 70

Distributions during the course of administration (interim distributions to residuary B) | Will also show final balance due to be distributed ## Footnote Distributions to other Bs shown in the capital account!

Question 71

Is there a specific form for the estate accounts? Who should sign them to indicate their agreement/approval?

Answer 71

* No specific form * Residuary Bs (and executors)