The financial implications of family bereavement

Approximately 570,000 people die in the UK each year.  But in only 5% of cases inheritance tax (IHT) is due. To borrow former US President Benjamin Franklin’s gloomy prediction “death and taxes” don’t always arrive together.

If you are unfortunate enough to suffer a death within your close family, and family members turn to you to discuss what should happen next to the deceased’s estate, you need the answer to three big questions: 

Is there a will?
  • Hopefully, the answer is “yes” because it gives certainty to how the estate is distributed and who has the responsibility for doing so.  The complications start if there isn’t one – in other words, the deceased was intestate - but even then, things will normally be straightforward.
  • On the first death of a married couple, the big assets, the house and personal possessions (car, furniture, and joint bank account) will usually pass to the remaining spouse by “survivorship” with little or no action needed.
  • On the second death, if there is no will, then a next of kin can apply to administer the estate in same way as if they had been appointed executor under a will.
How big is the estate?

This question matters because if the estate (which excludes items passing by “survivorship” to a surviving spouse) exceeds £325,000 then inheritance tax (IHT) at 40% on the excess over £325,000 must be paid to HMRC before the estate can be distributed.  This threshold of £325,000 has not been raised since 2009 so with house prices rising, more and more estates are being sucked into paying this tax, which is adding significantly to overall taxes raised.  The need to deal with HMRC and pay the tax up front adds an extra layer of complexity to what is already a complicated process.

Do you want to act as executor/administrator?

It may be you have been named in the will as an executor (alone or with others) or it may be there is no will and you are the next of kin empowered to apply to administer the estate.  Either way – you have a choice whether or not to act.  You could give up your right to be executor (or simply not apply if you are next of kin and there is no will) and leave it to the other executors or appoint someone else – solicitor or accountant – to act in your place. 

In deciding which course to take, here are a few matters you may wish to take into consideration:

  • Even though very few estates pay IHT, an IHT return is still required in about 50% of deaths.  Figures for 2015-16 indicate that in 38% of cases, the time taken to deal with a loved one’s estate was over 50 hours and in a few cases over 100 hours. 
  • The administrative burden is heavy.  Executors have to:
    • Apply to the Probate Office for the legal authority to manage the estate.
    • Track down all the financial documentation of the deceased.
    • Send all banks, building societies etc where the deceased held an account a death certificate and grant of probate in order to access their funds.
    • Open an estate bank account to receive/pay amounts due relating to the estate.
    • Pay off any debts such as unpaid utility bills.
    • Collect all other assets belonging to the deceased.
    • Distribute the estate according to the will (or Intestacy Rules).
    • Keep detailed records of all the above.
  • Experiences vary but bear in mind that the Probate Office, HMRC, the Department for Work and Pensions are always on the lookout for fraud and tend to deal with executors who are closely related to the deceased with rather more caution than for example, a firm of solicitors or accountants acting in the same role.
  • Beware too of bequests in a will stipulating that a charity should receive (say) 5% of an estate, as distinct from a specific amount (say) £10,000 because many charities go to great lengths to force an executor to demonstrate that their bequest does actually represent that percentage of the estate.

If all that hasn’t put you off then go ahead and take the appointment.  The only alternative is to invite a solicitor/accountant to act in your place.  This will result in the process happening in their timescales – not yours – and will not be cheap.  The answer to the “how much” question depends on the nature of the assets in the will and the number/type of beneficiaries.  If you decide to do it yourself then it will help enormously if you have a friend or colleague with experience of having done this themselves.  If you are a first timer, with no such support, then “good luck”.