Who is responsible for the payment of inheritance tax?
A Personal Representative whether they be an Executor appointed in a Will or an Administrator under intestacy, if there is no Will, have the responsibility to collect and gather in the Deceased’s estate and then administer it according to the law.
Consequently a Personal Representative is personally liable to any unpaid beneficiary or creditor as well as being liable personally for the payment of Inheritance Tax. The definition of Personal Representative is found in the Administration of Estates Act 1925, Section 55(1)(xi):
“The Personal Representative means the executor, original or a representation, or administrator for the time being of a Deceased person, and as regards any liability for the payment of death duties includes any person who takes possession of or intermeddles with the property of a Deceased person without the authority of the Personal Representative or the Court, …”
So the role of the Personal Representative is to gather in the Deceased’s assets, ensure that they are valued at the open market value at the date of death, discharge the Deceased’s and estate’s liabilities, pay any legacies and distribute the residuary estate (the balance of the estate after payment of liabilities) according to the terms of the Will or under the rules of intestacy.
So what happens if the Personal Representative fails to deal with all of the estate’s liabilities?
The Personal Representative is personally liable for all the estate’s debts being paid. This is the case even if he or she does not know what those debts are. Personal Representatives can be protected from unknown creditors by the placement of relevant notices under the Trustee Act 1925 in the London Gazette and a local newspaper, local to where the Deceased owned land or property. On expiration of the two month notice period, they will be protected from personal liability for any debts of whose existence they may not be aware. The creditor can, however, pursue the residuary beneficiaries.
However the position with Inheritance Tax liability is not so simple. Where there is an estate with a liability to Inheritance Tax, this must be paid before the Grant of Representation (Grant of Probate or Grant of Letters of Administration) is issued. The exception is in relation to land and real property where the Personal Representatives can elect for the Inheritance Tax to be paid in ten yearly instalments; in this case, only the first instalment must be paid before a Grant can be issued. Subsequent payments are then made annually. If at any point during the ten years the property is sold, then the Inheritance Tax and any interest must be settled in full.
Personal Representatives should be aware that they have a statutory obligation to account for Inheritance Tax under section 200 of the Inheritance Tax Act 1984.
This personal and ongoing liability has been highlighted in the recent case of Glyne T Harris as Personal Representative of Helen Norma McDonald v HMRC.
Mr Harris was appointed as Personal Representative of the Late Helen McDonald by Letters of Administration dated 12 June 2013. Mr Harris had filed a full Inheritance Tax account in April 2014. HMRC then opened an enquiry into the Inheritance Tax account and in October 2015 they issued an Inheritance Tax determination. They determined that the value of the estate for the purposes of Inheritance Tax at the date of the Late Helen McDonald’s death was £1,170,196.92 and so the Inheritance Tax payable was £341,278.76.
Mr Harris requested a statutory review of the determination, the conclusion of which he then appealed against. The basis of his appeal was that he did not have the funds to pay the Inheritance Tax.
HMRC applied for the appeal to be struck out on the basis that there was no reasonable prospect of success.
It would appear from the Judgment that Mr Harris, following the sale of the Deceased’s home, released a substantial amount of the estate’s funds to the Deceased’s brother Whitfield Harewood, who was a beneficiary of the estate, on the understanding that Mr Harewood would pay the estate’s bills and taxes. Mr Harewood then returned to Barbados where he lived and did not discharge the outstanding Inheritance Tax.
The Judge held that it was no defence that Mr Harris may have transferred assets on the understanding that the beneficiary would be responsible for the Inheritance Tax due, nor that Mr Harris was ignorant of his obligations with regards to the payment of Inheritance Tax.
This case serves as a salutary reminder that a Personal Representative’s personal liability lasts until all Inheritance Tax, interest and any related penalties have been paid. No distribution should be made to beneficiaries until all the Inheritance Tax is settled. If the instalment option has been chosen, the Personal Representative will continue to be responsible for the payment of all the instalments until no further Inheritance Tax or interest is due.
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