PROBATE PERILS

Claire Menni –  Chartered Financial Planner

Being named executor in a will or being engaged to assist with estate administration holds a lot of responsibility and can be an exceptionally complex job. Often there are multiple parties involved, all of whom need communicating with, and all of whom are also processing the recent bereavement.

They are all also likely to be working their way through the minefield of probate requirements and potentially different jurisdictions and laws of succession. There is often a variety of assets; each with their own characteristics and some with an emotional attachment.

Whilst heart-breaking to learn of the death of a client, there is also the privilege of ensuring their last wishes are met and the family are supported.  As Financial Planners, we hold a lot of information needed by executors to apply for probate on behalf of an existing client. Therefore, we can provide not only a probate valuation for many of the assets, but also further assist with the distribution of these assets.

We are also able to explain to executors and beneficiaries the options available in areas like pension death benefits and other investments.  We can act on behalf of estates for whom the deceased was not previously a client, and where executors seek advice in relation to specific assets or the beneficiary/ies. I am going to focus on certain investments within estate administration, however, please click here to read our blog on pension death benefits which you may also find helpful.

A beneficiary left a pecuniary legacy in a will can normally expect to receive it in cash, without further tax reporting or liability on them.  Executors would also want to achieve this, avoiding the added complication of paying a legacy on one hand, but potentially seeming to disadvantage the beneficiary on the other with a potential tax liability. This liability may bring the added burden of reporting to HMRC on their tax return.  If the estate has sufficient liquid capital assets to meet the legacies this is all well and good, but what if the executors have to use monies held within certain investments that do have added tax considerations?  What are the key points to consider? 

Firstly, it’s worth asking if you are able to distribute capital on which there is no further tax reporting or liability for the beneficiary. If not, you may be distributing income (assuming assets are not being transferred in-specie). This should then pass to beneficiaries with a declaration of tax paid and form R185. Recipients would need to report this income to HMRC for assessment on them personally for any tax rebate or additional tax due.

An investment bond is one of those investments where monies can fall into either income or capital. This is essentially an investment contract with nominal life cover attached. If the owner was the last surviving life assured on the bond, the bond would come to an end on their death. Any chargeable gain on the bond would be taxed as income and assessed to basic rate income tax on the estate, without the availability of top slicing relief*.  The same would apply if the executors made a partial withdrawal or full surrender of the bond. Any monies distributed from this source would be done so with an R185 and the recipient also cannot use top slicing relief here. 

Often, an investment bond is structured in such a way to provide additional flexibility. There may be additional lives assured named on the bond who outlive the deceased owner, and if this is the case, the bond doesn’t automatically close on death.

 

In this scenario, the executors must release the monies as they see fit.  Making a full or partial withdrawal comes with the complexities detailed above, however one option could be for beneficiaries to inherit the bond in-specie; in its entirety or through assigned segments of the bond. The beneficiary inherits the bond/segments with all their characteristics and usual tax treatment intact.  Arguably, via assignment the legacy is being paid carrying with it some potential tax liability.

 Alternatively, the executors may have the ability to make a ‘tax deferred’ withdrawal from the bond if not already used.  This would realise monies from the bond, allowing them to pay the pecuniary legacies with unhindered cash, as the tax deferred withdrawal is essentially a return of the capital invested.  This option potentially allows legacies to be met in a rather straight forward way for both the executors and beneficiaries.

Tax deferred suggests that tax can essentially be kicked down the line, so whoever inherits the remaining bond structure will have any previous withdrawals included in the tax computation should they make chargeable gains from the bond. This may be acceptable to all for the other benefits this route can afford and given the residuary beneficiary’s likely tax position.

This is just one example of how involving a Financial Planner can help the estate administration process.  If you have any cases where you’d like to discuss potential options, do contact us for a no obligation consultation.

 

*Top-slicing relief allows a gain made on an investment bond (both onshore and offshore) to be ‘annualised’ to allow the policyholder to pay tax at a rate equivalent to the rate that would have applied if the gain had been taxable in each year it was made – rather than all in one yea

This blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions and should be considered as guidance and not advice.  It is important for all individuals examining their pensions to seek expert financial advice from a regulated financial adviser.  Solicitors should be cautious when examining pensions with their clients as it is easy to stray into the area of regulated financial advice.  None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. 

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