Personal Representatives - beware HMRC

It is said that the only two certainties in life are death and taxes and the role of the Personal Representatives involves both of these. A Personal Representative is responsible for dealing with the administration of the estate of someone who has died. If the deceased has left a Will which makes a valid appointment of a Personal Representative, they are called an Executor. If there is no valid appointment in a Will or no Will at all, they are called an Administrator. In either case, the Personal Representative has significant personal duties for the administration of the estate.

Many lay people take on the administration of the estate of a friend or relative who has died without the benefit of professional advice. If the estate is straightforward, this approach is understandable. However, taking on the role of a Personal Representative involves responsibilities which can impact on the individual if something goes wrong. The most obvious of these is in relation to the payment of tax when someone has died.

In general terms, the main tax which must be considered is inheritance tax (IHT). There is normally no IHT to pay if the value of the estate is below the tax threshold of £325,000 or the entire estate is left to a spouse, civil partner or charity. However, a significant responsibility imposed on Personal Representatives is to ensure that assets in the estate of the deceased are properly valued. These figures must be submitted to HMRC as part of the process of obtaining a Grant of Representation. If these figures are incorrect, HMRC can open an investigation into the estate. If it transpires that tax has been underpaid, HMRC has wide-ranging enforcement and clawback powers.

HMRC has recently issued figures showing that it opened over 3,500 investigations into IHT in 2020/21. Underpayment of IHT can be a lucrative source of tax receipts for HMRC.

The rules relating to IHT exemptions and reliefs have become more complex since 2015 because there is an additional exemption which can be applied to the estate of someone that has died if they leave their residence to a close relative. However, the basis of the calculations must be on proper, accurate valuations and this is a risk area for Personal Representatives. Property values have increased considerably in recent years. If a property in an estate is undervalued, this could result in no IHT being paid, or less tax than is, in fact, due.

Anyone taking on the role of Personal Representative should bear in mind that the role involves unlimited personal liability meaning that the Personal Representative could foot the bill if something goes wrong. If HMRC finds that tax has been underpaid, a penalty and interest could also be levied.

The recent HMRC figures demonstrate that investigations into the affairs of those who have died are likely to continue. Personal Representatives may consider it prudent to take professional advice, even if the administration of the estate initially seems straightforward.

To discuss this or any other private client matters, contact us.