If you have agreed to act as an executor for a friend or relative your usual priority after their death is to do the best you can to address their last wishes. Few executors think about protecting themselves at the start of what can be a hugely complicated undertaking. Even apparently straightforward wills can generate problems and many lay executors don’t realise they face unlimited liability if they make a mistake in the distribution and management of an estate.
One area that new executors often find very complex and difficult to manage is Inheritance Tax which is payable on any estate valued at more than £325,000 (unless the estate is passing directly to a spouse). The total value of the estate has to be submitted to the tax office within 12 months of the estate owner dying but inheritance tax is payable six months after the person has died, unless you agree to pay in two instalments – the first after 6 months and the second after 12 months. Grant of Probate will not be given until the Inheritance Tax is paid so you can end up in a ‘chicken and egg’ situation. Most banks will allow a named executor to access and pay Inheritance Tax out of the estate account but some will not without Grant of Probate. In such circumstances an executor may need to take out a loan to pay the Inheritance Tax. If executors fail to submit accounts on the due date or fail to pay Inheritance Tax in time they are personally liable to HMRC for any interest and or penalties.
However, there is some room for manoeuvre on property assets – as executors or beneficiaries may not want, or may not be able to sell a property to release capital funds for Inheritance Tax. In these circumstances HMRC will allow executors to make payments on account for a maximum of 10 years.
A more difficult problem with property and Inheritance Tax is obtaining the right valuation in the first place. HMRC are pursuing more executors for the undervaluation of property for probate, seeking to increase Inheritance Tax revenue and impose penalties. In 2011 S.T.E.P Chief Executive, David Harvey said “The extensive powers now available to HM Revenue and Customs pose a serious financial risk to lay executors who make honest mistakes when getting a house valued”. If the executor makes a mistake in valuing a property (for example by not taking into account development potential) and miscalculates IHT as a result, they become liable for penalties, even if they attempt to rectify the error by increasing the Inheritance Tax payment.
Executors’ liability insurance is designed to provide protection for executors dealing with complex issues like Inheritance Tax but it needs to be taken out at the outset before problems arise. Increasingly we hear from people after a serious problem has come up and an indemnity policy simply does not work under these circumstances when there are known problems.
Visit our new website at www.executorsinsurance.co.uk for further information or contact us as set out below
About the author
Guy has worked in the insurance profession for over thirty years, initially in the London Insurance market as a broker and subsequently as a Lloyd’s Members’ Agent. He set up private client insurance brokers Castleacre in 2005. Castleacre is the first company in the UK to offer indemnity insurance to lay executors – in direct response to clients who had become executors but could not find suitable cover on the market. If you have would like to know more about executor liability insurance or to contact Guy click here. If you wish to view the Executors Insurance blog click here.