Being an Executor: Can you be liable for Inheritance Tax?
Before you agree to taking on the role of an Executor it’s important to be aware of all the potential responsibilities that it entails. Being asked to become an Executor for a friend or a relative can seem flattering, indeed quite an honour, but not everyone understands exactly what they are taking on.
When the person dies, as Executor you are obliged to deal with their Estate ensuring that their Will, assuming they had one, is adhered to. It will be your responsibility to make sure the deceased’s Estate is correctly valued for inheritance tax purposes and that any outstanding tax bill is paid. While that may seem obvious, what is not obvious is that the Executor can be personally liable for the IHT bill even if they are not a beneficiary (it’s worth pointing out that it is possible to be both a beneficiary and an Executor of the same Will).
Being an Executor in England and Wales
In England and Wales, an Executor can be held personally financially liable for any loss that a breach of their duty incurs, regardless of whether the error was inadvertent or intentional. Executors are obliged to disclose all known information about the Estate of the deceased, typically income from bank accounts, liabilities from credit cards, utility bills and other outstanding debts.
Risk of legal proceedings
Interestingly, beneficiaries may start legal proceedings against the Executor in certain circumstances, often to recover losses incurred due to errors made in the Estate administration process. Verifying that all the Estate information is accurate is a crucial part of the Executors role and it may be appropriate to complete financial asset searches and gather further information by other means to ensure all assets and liabilities have been located and accounted for.
Dealing with Estate funds
When dealing with Estate funds, all liabilities must be paid before funds are released to any beneficiaries. If there are insufficient funds within the Estate to pay all debts, the Executor will need to prioritise the funeral costs and associated expenses before following the procedure for an illiquid Estate (one in which the assets are not easily converted into cash).
Mr. Harris Case study
In 2013 a Mr Harris was made Executor of a £1.2m estate. He filed an IHT return with HMRC and paid the initial taxes due. However, as the Estate included land the remaining balance owed to HMRC didn’t need to be paid immediately. Mr Harris arranged for the Estate to be passed onto the beneficiaries; in this particular case the majority of the Estate went to one individual. There was an agreement that this beneficiary would settle the remaining IHT bill. Unfortunately this beneficiary immediately headed to Barbados and didn’t pay the bill. This left the Executor liable to pay the remainder of the £340,000 bill. As he no longer had the funds from the Estate to cover this cost he appealed, denying personal responsibility for it.
A judge ruled that Harris is in fact personally liable for this, and HMRC could potentially seize Harris own assets, including his house.
Of course this is an extreme example but a good illustration of fact.
Paying IHT bill
A more frequent issue is the question of how to pay an IHT bill when assets need to be sold to cover the cost. HMRC expects IHT bills to be settled within 6 months of an individuals death, after which it will start charging interest on unpaid tax.
An Executor cannot sell assets until probate has been granted.
How to pay the bill
Fortunately there are some options available to circumvent Executors personally funding IHT bills.
- If the deceased has enough cash or investments to pay the bill then you can approach their bank or investment manager and ask them to release the money. Most are willing to assist.
- Additionally, if the Estate contains certain assets that need to be sold in order to pay the bill HMRC will allow you to pay in instalments. This includes property and shares that gave the deceased more than 50% control of a company. The first instalment is due 6 months after the death date and the rest is paid in annual instalments until the assets is sold.
- In case of property, you can pay the IHT in annual instalments of 10% of the bill, plus interest, if a beneficiary chooses to live in the property, meaning it won’t be sold. Be aware though that interest is charged at 3% for instalments.
- The final option is to take out an Executors loan to cover the IHT bill until probate is granted. Assets from the deceased’s Estate can then be sold to cover the loan repayment.
Finally, if all this is too much responsibility, you can always refuse the request to become an Executor. Whether you are appointed under a Will as an Executor or you become an administrator of an estate because of intestacy, you can officially renounce the nomination. Always ensure you take impartial professional advice for all your Inheritance Tax and Estate Planning issues. Contact us now