Do it Yourself Probate: the tax pitfalls

As Wills and Probate lawyers, we understand the rules about the tax implications of a deceased person’s estate. From our experience, most people have heard about Inheritance Tax. However, there are some myths out there about how it works. This can be a real problem with the rising trend of Do It Yourself probate.

Recent changes to Inheritance Tax law, such as the Residence Nil Rate Band Allowance, have added to the general confusion. The purpose of this article is to highlight the complexities of estate tax compliance.

Do it Yourself Probate and tax law

No doubt as a direct result of the internet age, we have seen a rise in the number of Do It Yourself probate applications. These applications aren’t prepared by or haven’t been checked by a lawyer. This is one of the reasons why the fee for a personal application is higher.

Collecting complete and accurate information about the estate for HMRC’s Inheritance Tax Office can be a real challenge. Especially when trying to make sure that their forms are correctly completed. Recognising that this is particularly difficult for personal applicants, HMRC has developed a ‘toolkit’ guide to help people to understand what information is needed and to avoid errors.

Rules for large estates

Executors of larger or more complex estates need to report the estate’s assets and liabilities to HMRC’s Inheritance Tax Office. This should be done before they can apply for a Grant of Probate. There are rules about which estates have to be reported. There are also penalties if the executor fails to report within 12 months from the end of the month in which the death took place.

If the report is late, HMRC will charge a penalty of £100. Further penalties apply if the report is late for a longer period of time:

  • £200 penalty if the account is more than 6 months late
  • A maximum penalty of £3,000 if the account is more than 12 months late

Do it Yourself Probate and liability for the executor

An Executor has a duty to ensure that the estate is correctly valued for Inheritance Tax purposes. The executor also has to make sure that the correct amount of tax is paid. Many people, however, do not realise that an Executor could be personally liable for the tax bill.

Executors must take ‘reasonable care’ when completing the Inheritance Tax account, because HMRC will charge a penalty where there is deemed to have been a ‘careless or deliberate inaccuracy’. These penalties are based on a percentage of the lost revenue. Accordingly, it is important that probate valuations for the assets of the estate are accurate.

Property valuations, as well as valuations for unquoted shares and personal possessions, are particular areas that HMRC will focus on. In these cases, Executors should instruct professionals to prepare valuation reports, which can be submitted to HMRC together with the Inheritance Tax account.

HMRC horror stories

Hutchings v HMRC

This case is a strong reminder to anyone considering Do It Yourself probate. You are obliged to make the fullest enquiries possible about the estate.

In particular about lifetime gifts made by the deceased before submitting the Inheritance Tax account. HMRC is taking a hardline approach to non-disclosure of lifetime gifts. Mostly because these gifts can have a bearing on how much Inheritance Tax is payable.

Whilst the Court found in this case that the Executors had not been at fault for non-disclosure of a substantial gift made by the deceased to his son before he passed away. They might have been made personally liable for the £87,000 penalty, which was imposed on the son as the recipient of the gift.

The case also clearly confirms that the recipient of a gift like this from the deceased has a duty to disclose it to the Executors of the estate.

Ensure the correct tax is paid

Another recent case also sends a stark warning to Executors. You must ensure that all taxes and other such liabilities have been paid before distributing the estate to the beneficiary.

The unfortunate Executor in this case was held personally liable to HMRC for £340,000 unpaid Inheritance Tax. He had transferred a piece of land to a beneficiary on the understanding that the beneficiary would pay the tax. The beneficiary disappeared and the Executor was left without money to pay the tax bill.

The Executor tried to appeal on this basis, but the judge held that he was personally liable. As a result, HMRC could now go after his personal assets, including his house. A sobering tale…

In short, Executors must make a full, honest, accurate and timely disclosure of the deceased’s assets to HMRC. Otherwise you can face penalties and complaints of negligence from the beneficiaries of the estate who stand to lose out if you do get it wrong.

In light of a rising number of personal applications for Grants of Probate and the ever-increasing complexities of Inheritance Tax law, I believe that Wills and Probate lawyers still have a valuable role to play in supporting and guiding Executors.

Support for Do it Yourself Probate executors

My team now offers an Executor Support Service. This service is specifically designed for those Executors who only need help with the more challenging aspects of the estate. Whether that is completing the Inheritance Tax account, reporting the estate’s income to HMRC, or the preparation of estate accounts for the beneficiaries.

Dealing with a loved one’s estate can be a stressful and onerous task and so whatever it is you may be struggling with, we are here to help.

A fixed fee initial interview

Astle Paterson’s Wills & Probate team offers an Executor Support Service which is specifically tailored for lay Executors and an initial fixed fee interview of £150 plus VAT.

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