Flora Nelmes examines the steps involved in obtaining probate in Taxation

This article was originally published in Taxation and can be accessed here. 

The steps involved in obtaining probate

Losing a loved one is an emotional and difficult time. If a bereaved person becomes a personal representative (‘PR’), responsible for handling the deceased’s affairs, he or she might be navigating the probate process and complex world of inheritance tax (‘IHT’) for the first time. This can prove overwhelming and professional advice is often needed.

Applying for the legal right to deal with someone’s property, money and possessions when they die is called ‘applying for probate’. There are various steps to take which can involve complex accounting and tax considerations.  Accountants are often asked to help PRs and their solicitors with the information required for the application for probate, and their knowledge of the deceased’s lifetime affairs can prove invaluable.

What are the duties of a PR?

The primary duty of a PR is to collect in and administer the assets according to the deceased’s will or, if there is no will, according to the rules of intestacy. To do this, a PR will often need to obtain a grant of representation, which is the document that proves a PR’s authority to deal with the deceased’s assets (the ‘estate’).

There are two types of Grant: (i) if the deceased left a valid will, an application will be made for a Grant of Probate; and (ii) if there is no will, an application will be made for a Grant of Letters of Administration.

The term ‘probate’ refers to the process of proving a will by executors. However, it is commonly used more broadly to refer to the process of administering an estate.

Duty to submit an IHT account

Before the PRs can obtain a Grant allowing them to deal with the deceased’s assets, they first need to report the deceased’s estate to HMRC by completing an IHT account and paying any IHT that is due. The deadline for filing the IHT account is 12 months from the end of the month in which the deceased died, but if IHT is payable, interest starts to run on any unpaid tax from 6 months after the end of the month of the deceased’s death.

With these deadlines in mind, the PRs must ascertain the value of the deceased’s assets and liabilities, together with any available IHT exemptions or reliefs, in order to complete the IHT account and calculate the IHT payable.

Information gathering

Unless the deceased kept meticulous records, it will be necessary at the outset for the PRs to undertake a search of all the deceased’s papers and property in order to establish what they owned and owed. This will include gathering details about the deceased’s assets, including any:

• Bank accounts
• Digital assets (e.g. online-only accounts, crypto-currency holdings)
• Chattels (e.g. cars, jewellery, artwork, household contents)
• Pensions and life insurance policies
• Property (including details as to whether this was owned as joint tenants or tenants in common if not solely owned)
• Investments
• Trust interests

Liabilities are particularly important where there is IHT to pay as they help reduce the tax payable. Common liabilities include:

• Mortgages
• Funeral expenses
• Loans
• Care home fees
• Household bills

As more people choose to go paperless and receive all their statements online, obtaining comprehensive information about the full extent of the deceased’s assets and liabilities is not always easy. If there is any doubt over missing or incomplete records, PRs often reach out to the deceased’s family and friends as well as financial advisors, employers and accountants. In some cases, the deceased may have stored a list of assets and/or important contacts with their solicitor who drafted the Will (if applicable).

PRs should also make enquiries as to whether the deceased made any gifts or transfers into a trust in the last seven years of their life, as these may also need to be reported to HMRC.

How can an accountant assist?

The information gathering aspect of probate is greatly simplified where the deceased had an accountant who has a detailed knowledge of their financial affairs. The solicitor or PR will usually write to the accountant to request copies of the deceased’s tax returns for the last couple of years, which provide a good point of reference for identifying assets and liabilities.

The accountant can also play a vital role in preparing the tax return to the date of death. This can prove useful where there is IHT to pay, since any outstanding pre-death tax liability can be included as a liability in the IHT account and help reduce the IHT bill. If the deceased had insurance policies that paid out on death, accountants should be minded to ask PRs about chargeable event certificates when preparing the tax return.

Information about gifts or transfers into a trust in the last seven years of the deceased’s life can be extremely difficult for PRs to gather. An accountant familiar with the deceased’s finances may be able to provide these details as well as help in the preparation of the IHT Schedule 403 (‘Gifts and other transfers of value’). In particular, accountants may be able to provide assistance with filling in the table entitled ‘Gifts made as part of normal expenditure out of income’ which involves analysing the deceased’s net income and regular expenditure in the seven years prior to death.

Valuations

Having identified the deceased’s assets and liabilities, relevant parties need to be notified of the deceased’s death and asked to provide the value of the relevant asset or liability as at the date of death.

In the case of property, PRs must obtain an open market valuation as at the date of death. Depending on the value of the property and the tax status of the estate, it may be possible to use three informal estate agent market appraisals (from which the average value is taken). Otherwise, a formal ‘red book’ valuation needs to be arranged with a professional valuer (e.g. a RICS surveyor).

Similarly, a professional open market valuation may be needed with chattels, depending on the type and estimated value of the items.

If the deceased had shares in a private company, the accountant is usually the first port of call for ascertaining the value of the deceased’s interest for IHT purposes and advising as to the availability of Business Property Relief.

Completing the IHT account and calculating IHT

Once the deceased’s assets and liabilities have been determined and values obtained, the IHT account can be prepared and IHT calculated. IHT will be payable where the estate’s net value exceeds the IHT nil rate band (‘NRB’) (currently frozen at £325,000 until 2026) and, if applicable, the residence NRB (also currently frozen at £175,000 until 2026). Any excess above these thresholds will be subject to IHT at 40% unless any exemptions or reliefs apply that reduce the amount payable.

In some cases, IHT can be paid on the deceased’s house or other real property in instalments over a period of ten years, or until such time as the property is sold, if earlier. If the deceased was a widow or widower, transfer of the previous spouse’s NRB can be claimed if unused (including, if applicable, their residence NRB), even if they had remarried.

Determining which IHT form should be completed

The IHT205 is the shorter form and, broadly, can be completed when the deceased was domiciled in the UK, there is no IHT to pay and the gross value of the estate does not exceed £1 million. Whereas the more detailed IHT400, with supporting schedules, must be completed if IHT is payable and for larger, more complex estates.

Submission of IHT account

Once signed, the IHT205 should be submitted to the Probate Registry who will then process the application for the Grant. By contrast, the IHT400 should be submitted to HMRC together with any IHT paid. HMRC will send a receipted form to the Probate Registry, which will enable the Registry to process and issue the Grant.

Recent changes

Following recommendations by the Office of Tax Simplification, the government has announced plans to cut the IHT ‘red tape’ by reducing the administrative burden.

Reporting regulations will be simplified so that from 1 January 2022 over 90% of non-tax paying estates will no longer have to complete an IHT account for deaths when probate or confirmation is required. In addition, the current temporary provision for those dealing with a trust or estate to provide an IHT return without requiring physical signatures from all those involved will be made permanent.