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Will you know what to look out for as an executor?

5 min read
Tom Bostock, Financial Planner20 Jan 2021

We frequently discuss the importance of wills and Inheritance Tax (IHT) planning with our clients.

What is less frequently discussed however, is the actual mechanics of dealing with an estate, and the role and responsibilities of executors. Whilst it is possible to appoint professionals to deal with an estate and the probate application in the event of death, (this can of course be stipulated within a will), what is much more common is simply nominating a next of kin, or beneficiary, for example children.

The complexity of individual estates can vary a huge amount, and with this, so does the administrative burden on executors. Where children are appointed executors, they may not be particularly knowledgeable of the complexities of IHT rules, and there are a number of pitfalls that might catch out those dealing with an estate.

The likelihood of this increases with the complexity and potentially also the size of an estate. Where there are significant assets, spread across multiple policies, this can be a particularly daunting task for individuals, during what is already an emotionally difficult time.

The pandemic has highlighted the need for planning for the future, and with enquiries about getting a will drawn up increased by 76% since the start of the coronavirus pandemic*, here we review some key areas prone to pitfalls for those less experienced.

Watch out for the tax man

Whilst calculating the IHT liability on an estate will likely be the focus of attention, it is important to also be aware of the Income Tax and Capital Gains Tax (CGT) liabilities. Dealing with an estate through to probate being granted can take many months, if not years, to be finalised. During this period, assets within the estate may continue to generate income (such as rental property and certain investment assets). This continues to be liable to income tax and as such, tax returns need to be completed and submitted. With respect to CGT, the current position is that underlying gains, for example within investments or property, are eliminated on death. As such, executors may completely disregard CGT. However, let us consider the scenario where markets rise rapidly, for example, recovering from the depths of a crisis as we saw in the second half of 2020. If an estate with large investment portfolios is being managed through this period, the gains realised from date of death to probate being awarded need to be accounted for. If these happen to breach the available allowances, CGT would be due.

Unwrapping your investments

Close attention needs to be paid to the types of investment held within an estate. Most people will be familiar with ISAs and pension funds, but as we try to help individuals build and structure their wealth in a tax efficient manner, there are additional structures or ’wrappers’ that may be appropriate. An example of these is investment bonds. On occasion these are set up with ‘lives assured’ attached, meaning that in the event of the death of the last life assured in the policy, the investment would automatically be encashed. This would likely lead to a tax liability, a consequence that needs to be considered before an estate is finalised and distributed.

A gift that keeps on giving…to HMRC?

The rules around gifting can be complex, particularly when there has been a mix of direct gifts to beneficiaries, as well as gifts into trust, which are treated differently. We always outline the importance of keeping a detailed record of any gifts made during life, but this may not always be the case in practice. If an estate is handled without full and complete knowledge of previous gifts that have been paid, there is potential for challenges from HMRC, leading to difficulties later on, and potential tax penalties.

This is just a selection of the issues that individuals need to be aware of when acting as executors to an estate. If any of the above, or indeed a number of other areas, are not handled correctly, either through a lack of knowledge or deliberate negligence, there could be severe financial penalties.

As such, it is always sensible to seek professional advice and guidance in this respect. It may be the case that a couple of pointers are all that is required. However, for the more complex cases it could be worth investing in professional advice, to avoid potentially far larger penalties for getting things wrong.

Tax rules are subject to change and taxation will vary depending on individual circumstances.

Any reference to specific investments are included for information purposes only and are not intended to provide stock recommendation or investment recommendations to individual investors. Please consult a financial professional before making any investment decisions.

* https://www.thegazette.co.uk/wills-and-probate/content/103539

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