The Five Steps of Probate
Dealing with the death of a family member or close friend is always difficult for those involved, and the last thing anyone wants to grapple with when grieving is a host of complex tax and legal procedures. It is no wonder that the probate process is a daunting prospect to those obliged to engage with it – the deceased’s ‘personal representatives’ (known as ‘executors’ when they are appointed in a will).
This is a simple guide to the probate process, broken down into five key steps:
Step One – The immediate post-death requirements
Setting aside the details of the funeral arrangements, when someone dies in the UK there are several steps that the personal representatives (PRs) need to take or in which they may have to involve themselves:
- Registering the death and taking decisions about the body: the death must be registered with the UK authorities within five days. You will need to establish whether the deceased left any instructions (concerning, for example, burial or cremation, or organ donation) which would have a bearing on the funeral arrangements.
- Preserving the estate: PRs are liable both to the deceased’s creditors and to their beneficiaries, so you will need to ensure as soon as possible that the deceased’s assets are adequately maintained and insured.
- Trusts: If the deceased was a settlor or beneficiary of any trusts, you should notify the trustees of the death.
Points to consider – Who is entitled to the estate?
At this stage, it is essential to determine whether there is a will and, if there is, to check its terms and validity, and to establish the beneficiaries of the estate and broadly what each of them is entitled to receive.
Possible issues in an estate can range from the validity of the will itself (for example, if it has been incorrectly executed) to potential claims against the estate from people who relied on the deceased during their lifetime but who are not entitled to anything under the will.
The PRs should take legal advice to determine whether there may be any difficulties or risks in dealing with the estate.
Step Two – Valuing the estate
Once the initial steps have been completed, usually after the funeral has taken place, the PRs need to make enquiries into the deceased’s assets and liabilities in order to obtain accurate figures for the HM Revenue and Customs (“HMRC”) inheritance tax (“IHT”) return.
Depending on the assets involved, formal market valuations may be needed, or it may simply be a case of writing to the relevant asset holder (e.g. a bank or investment manager) to obtain the information required. Most assets will be released to the PRs only on production of the grant of probate later in the administration, although many banks will release funds to pay IHT.
Any liabilities the deceased had during their lifetime, such as debts, overdrafts and outstanding tax liabilities, must also be recorded in the IHT return and settled when funds are available.
If the PRs are not sure whether they have identified all the deceased’s assets and liabilities, a financial asset search can be conducted.
Points to consider – Advertising for unknown creditors
A common concern at this stage is whether the deceased had any liabilities of which the PRs are unaware. It is essential for PRs to appreciate that they are personally liable to the deceased’s creditors, even after the estate has been distributed. However, the PRs can protect themselves from personal liability by placing creditor notices (also known as “Trustee Act Notices”) in the London Gazette and a newspaper local to the deceased’s home.
Step Three – Preparing the IHT Return
Once the value of the assets and liabilities has been ascertained, the IHT position must be reported to provide HMRC with details of the estate’s value. The nature of the report depends on the value and composition of the estate. If an informal report can be made, it is submitted as part of the grant application process itself, although is important to appreciate that even for estates where no tax is due, the PRs may need to submit a full IHT return (for example, if the estate is over £3m). If the informal report is not appropriate for the estate, the PRs need to submit the full IHT return; the IHT400. The PRs also need to collate details of all gifts made by the deceased within seven years of their death and ensure that they also are reported in the IHT return .
A calculation of the IHT must be prepared. The PRs are responsible for settling any IHT arising on assets owned by the deceased at the date of his death. If the deceased made gifts during their lifetime in excess of their nil rate band (£325,000), these can also become subject to IHT as a result of the death. The recipients of the gifts are prima facie responsible for the IHT, albeit the will typically stipulates that it should be paid from the estate.
The IHT is due by the end of the sixth month after the deceased’s death, after which interest starts to run. For certain assets (such as property or unlisted shareholdings) there is the option to pay IHT in instalments over ten years or (if earlier) until the asset is sold, with interest running on the outstanding balance until it is settled.
The IHT400 is submitted to HMRC and, on payment of the IHT due, HMRC issue a code to the PRs or their solicitors which enables them to proceed with the grant application. (No code is required in order to make the application for an estate requiring only an informal report.)
Points to consider – Assets discovered after submission of the IHT return, and varying the estate
There is always a chance that assets may be found after an IHT return has been submitted, in which case a corrective IHT form must be filed and any additional IHT (and interest) paid promptly.
It may be that for tax or personal reasons, beneficiaries would like to redirect assets that would otherwise come to them under the will. This should be done within two years of the death through a formal deed of variation. The deed may affect the tax payable on the estate, and therefore may need to be taken into account when preparing the IHT return and calculations.
Step Four – Applying for the Grant
For estates requiring a full IHT account, the grant application can be prepared and submitted only on receipt of the HMRC code.
The grant is the document which confirms the PRs’ authority to deal with the deceased’s UK assets, enabling them to collect the assets, pay liabilities, and distribute the balance according to the terms of the deceased’s will (or intestacy rules in the absence of a will).
The probate court issues different types of grants, the main types being a grant of probate (if the deceased had a will), and a grant of letters of administration (if the deceased died intestate, i.e. without a will).
Different timescales apply depending on the complexity of the grant required, and some applications currently need to be made online while others must be submitted on paper. Irrespective of the mode of application, the original will (and any codicils) must be sent to the probate registry when the grant application is made and will be kept by the court. Some grants are issued within a fortnight, but sometimes the process can take several weeks.
Points to consider – Reservation and Renunciation
Some executors named in a will may not want to take on the responsibility of dealing with the estate, and there is no obligation (unless they have already ‘intermeddled’, i.e. presented themselves as being an executor or taken active steps in the administration of the estate) for them to do so. Executors who wish to step aside have two choices: to reserve their power to act as an executor, or renounce the position entirely.
If an executor has power reserved to them, they will not be required to act. However, they could make their own separate application for a second grant at any point in the future and would then become an acting executor (if, for example, their involvement was required because the first executor became unable to act for some reason).
If an executor chooses to renounce, they are giving up the role of executor entirely. They cannot reverse the decision if they later change their mind.
Step Five – Post-Grant Estate Administration
Once the grant has been issued by the Probate Registry, the PRs have the authority to call in the deceased’s assets. The PRs will then need to pay off all debts before proceeding to satisfy any bequests (that is, gifts of particular items such as paintings or jewellery) and pecuniary legacies (cash gifts). PRs need to keep estate accounts to document the money received, assets transferred to beneficiaries and amounts paid out of the estate. The accounts will also confirm each beneficiary’s entitlement and can help the PRs to decide whether it is appropriate to make an interim distribution before the tax liabilities have been conclusively determined.
Before finalising the estate, the PRs will need to complete estate tax returns, reporting any income and capital gains arising during the administration period.
The final distributions can then be made, either through distributing cash (after collecting and selling estate assets), or by transferring estate assets (e.g. shares) directly to the beneficiaries.
Points to consider – Post-Grant Estate Planning
The post-grant administration period is an opportune moment for the beneficiaries to consider their own estate planning, particularly if they are receiving a valuable inheritance.
How we can help
Although each estate proceeds through the same stages, no two unfold in the same way. Particularly in cases involving unusual assets or property held outside the UK, our extensive technical knowledge serves to ensure that the administration proceeds in an orderly way and that the relevant tax authorities are dealt with appropriately, meaning that the PRs can be content that they have discharged their duties properly.
Forsters’ private client and probate specialists have a wide range of experience with both UK-based estates and foreign estates involving UK assets, so are able to deal with the most complex matters. We can take on the practical burden of the difficult and time-consuming estate administration process, explaining matters in plain English whilst ensuring that clients receive the support they need during a period which is often one of the most difficult times of their lives.
Guy Abrahams is a Partner and Naomi McLean is a Senior Associate.
