Legal Eagles: Probate and inheritance tax explained

Oct 14 2008 By Ayesha Mistry

Legal Eagles is produced by W Davies Solicitors of Woking. This week the team discuss probate and inheritance tax.

Probate means the proving of a will but the term is used in a general way to refer to administering the estate of a deceased person.

When a person dies, their estate needs to be fully dealt with. If the deceased person has left a Will, then the named executors are responsible for accounting for the assets and liabilities of the estate.

The estate is comprised of all of the deceased’s assets less any outstanding liabilities (which include funeral expenses) as at the date of death.

The executors (or a solicitor) must prepare an estate account: which is a record that lists all of the assets held by the deceased as well as any outstanding liabilities as at the date of death.

The total assets are known as the gross estate and once the liabilities are deducted, the balance remaining is known as the net estate. It is the net estate in which the Inland Revenue is interested.

If a person’s estate is less than, or up to the nil rate band allowance (currently £312,000), then their estate will not be subject to Inheritance Tax.

However if the estate is more than the nil rate band allowance, anything over the nil rate band allowance will be subject to 40% Inheritance Tax, unless the estate passes to an exempt beneficiary such as a spouse or to charity. It should also be noted that for inheritance tax purposes the value of certain lifetime gifts, in particular those made in the last seven years, form part of the estate.

In the case of spouses, when the first spouse dies, any assets passing to the surviving spouse, regardless of the value of those assets, will not be subject to Inheritance Tax. However, on the death of the second spouse Inheritance Tax may be chargeable.

Depending on the circumstances, and in accordance with recent legislation, the nil rate band allowance on the death of the surviving spouse can be doubled, which may mean in quite a few cases that no inheritance tax will have to be paid on death.

This is just a summary of the basic Inheritance tax rules; professional advice should be sought to establish whether your estate is likely to be subject to tax and, if so, how that tax may be avoided.

Regardless of whether the estate is taxable an Inland Revenue account is generally requires and it has to be submitted to the Inland Revenue when application for probate is made. If Inheritance Tax is due, then this must be settled when applying for the Grant of Probate.

In addition to reporting matters to the Inland revenue and paying any inheritance tax, the executor’s duties involve collecting in the assets of the estate, settling the estate’s liabilities and then to pay any legacy left to beneficiaries and to distribute the balance of the estate to the residuary beneficiary.

To enable the executors to collect in the assets of the estate, a Grant of Probate will need to be obtained from the Principal Probate registry in London or one of the District Probate Registries, which are distributed across the country.

The Grant of Probate is a legal document, which is sealed by the Court and confirms that the executors named in the will have the authority to deal with the deceased’s assets.

The way in which the Grant of Probate is obtained by executors acting by themselves is different to the way it is obtained by a solicitor acting on behalf of the executors. Generally the process can be speedier when a solicitor acts on behalf of the executors as once all the information has been gathered, the solicitor will prepare all the necessary paperwork, including an Oath, which is sworn by the executors, and these are submitted to the Probate Registry. If the executors act for themselves then they have to attend an interview at the Probate Registry.

Once the Grant of Probate has been received, sealed copies are sent to the asset holders so that the assets can be collected.

After the assets have been collected, all outstanding liabilities must be settled and then the estate can be distributed in accordance with the Will.

Sometimes the terms of a will do not provide for the most appropriate distribution of the assets or for the most tax effective distribution, because circumstances and legislation may have altered since the will was executed; in these cases it may be possible for a will to be varied by a Deed of Variation. Again professional advice will be needed to determine whether such a Deed can be used based on the particular circumstances.

If a person dies without leaving a will then administrators are appointed. This is usually the deceased’s next of kin and instead of obtaining a Grant of Probate, Letter of Administration are obtained. The deceased’s estate must then be distributed in accordance with the intestacy rules.

If you have any queries regarding the above, please contact: W. Davies solicitors of Acorn House, 5 Chertsey Road, Woking, Surrey GU21 3DT

Disclaimer: This information is for guidance and should not be regarded as a substitute for taking full legal advice.