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The need to complete IHT forms to get a grant of probate (or confirmation in Scotland) will be drastically cut from January next year. The Government has recently confirmed* in a letter to the Office of Tax Simplification that changes will be made, resulting in around 90% of applicants no longer having to complete any IHT forms if there is no tax to pay. This will help a great many clients, particularly where on the first death the entire estate passes to a spouse or civil partner free of IHT.

Together with a Government commitment to improve the online process and support, and the promised removal of the need for clients to sign a ‘statement of truth’, this will be a relief for many personal representatives looking to complete the distribution of the deceased’s estate quickly and easily as possible.

Advisers will  generally not be directly involved in applying for probate. But they still have an important role to play in helping the executors deal with investments held by the deceased.

Helping the executors

The executors role is to collect in the deceased’s assets, pay any bills including any tax due and then distribute whatever is left to the beneficiaries.

Advisers can add real value by helping executors understand the options available and the tax payable should investments be encashed during the administration period or simply transferred to an estate beneficiary.

Our practical guide to ‘Dealing with investments on the death of an investor’ covers the common questions relating to tax on the investor in the year of their death and during the administration of the estate. In particular it covers bonds, shares, OEICs and ISAs.

On larger estates, the executors may have to complete the Trust and Estate return SA900 to account for income and capital gains during the administration period. If so, they must also register the estate with the Trust Registration Service. This is confirmed in the newly published ‘Trust Registration Service Manual’.

Estates with an IHT liability

These new  simplified IHT reporting measures are likely to replace the existing shortened IHT reporting for ‘excepted estates’. These are estates below £1 million where no IHT is due as a result of a combination of the spousal exemption and the standard nil rate band, where currently the completion of an IHT205 form is required.

Estates where the residence nil rate band, business or agricultural relief are claimed do not qualify as excepted estates and it will be interesting to see whether these estates will be still need to do full IHT reporting once the new rules are published.

Where IHT is due on an estate IHT accounts (IHT400) will still be required.  Any IHT liability must be settled before probate can be granted and the assets  collected in. It must also be paid within six months of the date of death, otherwise interest will be charged.

This ‘Catch 22’ situation can be a problem for executors who need to find the cash to pay the IHT bill.

But there are several options open to them. The deceased may have had protection policies in trust to cover the IHT liability. In this case the executors should contact the trustees to organise the payment.

Banks and other financial institutions may agree to make a payment directly to HMRC. This could even include bond providers, so it's worth executors checking with providers to see if this is a possibility. Alternatively, the executors could ask the bank for a short term loan, although interest would be payable.

Failing these options, the executors could pay the bill from their own resources and reclaim from the estate once probate has been granted.

Who needs probate?

A grant of probate (or confirmation in Scotland) needs to be obtained before the executors can collect the assets of the estate and pay them out to beneficiaries.

However, probate is not always required. Typically this will be where spouses or civil partners own all of their assets jointly, such as the family home and investments such as bonds. On the death of the first partner, the ownership automatically passes to the survivor. The destination is not determined by the deceased’s will or under the rules of intestacy, and the spouse exemption ensures that no IHT is payable.

While there's no financial threshold that triggers the need for probate, some smaller estates may not need to apply. It's worth checking with each asset provider to check if they require an executor to provide proof of the grant. Each provider will have their own rules on this.

It's sometimes the case that the largest part of the beneficiaries inheritance comes from the deceased’s pension scheme. Where this is a scheme established under trust, or the benefits are paid out at the discretion of the scheme administrators, probate will not normally be required.

Similarly, any assets or life policies the deceased had gifted into a trust during their lifetime are not part of the estate and shouldn't require probate, although in some circumstances IHT may still be payable on these and the appropriate IHT forms must still be completed.

The probate process

Applications for probate can either be made via the Government’s online service or by post. In the case of the latter, the form required is PA1P if the deceased has left a valid will, or PA1A if there's no will and the estate is to be distributed in accordance with the intestacy rules (where strictly speaking the application is for ‘letters of administration’ rather than probate). Similar forms C1 and C2 are used in Scotland and are also available from GOV.UK.

Summary

Clearly the paperwork involved in sorting the estate of a deceased client can be a burden for executors at such a difficult time. It's positive news that the Government is actively introducing new regulations to relieve some of this burden. And we look forward to the new IHT reporting rules once they are published.

* Confirmed by letter from HM Treasury to OTS in response to consultation recommendations.