In recent years it has become increasingly common for executors appointed under a Will to obtain probate and administer the estate themselves to save Solicitors’ costs. There is plenty of information available online and many people take the view that there is no point in paying a Solicitor to do something that they consider that they can easily do themselves.
Obviously, we have to declare an interest here. We undertake probate and administration of estates as part of our service. However, putting that to one side we are sure that many executors who proceed without legal and accountancy advice do so in ignorance of the risks that they are taking.
The costs of getting it wrong
A recent tribunal case has highlighted the risks and consequences where executors proceed without representation and make mistakes in completing tax forms.
The case related to the completion of an income tax form for HMRC where the executors inadvertently under-declared the income tax liability of the deceased person. In non disclosure cases a penalty is normally payable. The amount depends upon the culpability of the tax payer (or where the tax payer is deceased his/her executors). The penalty tariffs for inaccuracies for UK tax matters are as follows:-
• 30% of potential lost revenue for a careless mistake;
• 70% of potential lost residue for a deliberate but not concealed action; and
• 100% of the potential lost revenue for a deliberate and concealed action.
HMRC has discretion to reduce penalties where there are special circumstances.
In this case the executors appealed against HMRC’s decision that they had deliberately under declared income tax. They admitted that tax had been under-declared but said that this was partly due to HMRC’s delay in dealing with the return. The executors were unaware that if they had placed an advertisement in the London Gazette calling on creditors to come forward and declaring their intention to distribute the estate then if no claims were notified they could have distributed the estate with impunity. The executors argued that this was a minor error and that the correct tax could easily have been paid had HMRC asked for it. HMRC said that a penalty for carelessness should be paid nevertheless.
The tribunal decided that the executors’ ignorance of the legal options open to them did not amount to special circumstances. They had chosen to risk the consequences of their own lack of legal and tax knowledge by failing to take advice from appropriate professionals. The tribunal took into consideration HMRC’s own mistakes and delay and the fact that the estate had already been distributed and they reduced the penalty to nil. The executors should consider themselves very fortunate. The report that we have seen does not say how much tax was under declared so we do not know how much the penalty would have been if the tribunal had decided otherwise.
If this isn’t enough to encourage executors to take proper advice then consider this:-
The Inheritance Tax (IHT) rules are becoming increasingly complicated.
Similar penalties apply if IHT is under-declared.
Many estates incur IHT liabilities of tens if not hundreds of thousands of pounds. A penalty of even 30% of inadvertently under-declared IHT without the right to a contribution from beneficiaries (who are perfectly entitled to say that it is the executors’ own fault) could be a very expensive mistake indeed.
Solicitors’ charges for acting for executors are very reasonable when compared to charges raised by other professions for taking similar responsibility. We are accountable for the advice we give and the action we take on your behalf.
If you are an executor please consider whether you can afford not to obtain proper legal advice. You will sleep far better if you do.