Grants of representation - Inheritance Tax implications

Learning Outcomes

After reading this article, you will be able to identify the main types of grant of representation, explain the legal duties of personal representatives regarding Inheritance Tax (IHT), and apply the rules on IHT liability, exemptions, and reliefs in the context of estate administration. You will also be able to analyse how grants of representation interact with IHT deadlines and payment, and recognise the consequences of errors or omissions for personal representatives in the SQE1 exam.

SQE1 Syllabus

For SQE1, you are required to understand the interaction between grants of representation and Inheritance Tax. In your revision, focus on:

  • the main types of grant of representation (probate and letters of administration)
  • the legal status and duties of personal representatives in relation to IHT
  • the process for calculating, reporting, and paying IHT before a grant is issued
  • the consequences of failing to pay IHT or making errors in IHT returns
  • the main IHT exemptions and reliefs relevant to estate administration
  • the impact of IHT on the timing and process of obtaining a grant

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. What is the main difference between a grant of probate and a grant of letters of administration?
  2. Who is primarily liable for paying Inheritance Tax on a deceased’s estate, and when must it be paid?
  3. Name two key IHT exemptions or reliefs that can reduce the tax payable on an estate.
  4. What are the possible consequences for personal representatives if they distribute the estate before IHT is paid in full?

Introduction

When a person dies, their estate must be administered by someone with legal authority. This authority is provided by a grant of representation. The process of obtaining a grant is closely linked to Inheritance Tax (IHT), as the grant will not be issued unless HMRC is satisfied that any IHT due has been paid or arrangements made. For SQE1, you must understand the types of grant, the duties of personal representatives, and the IHT implications at each stage of estate administration.

Types of Grant of Representation

A grant of representation is the legal document that authorises a person (the personal representative) to collect in, manage, and distribute a deceased person’s estate.

Key Term: grant of representation The legal authority given by the court to a person to administer a deceased person’s estate. It includes both grants of probate and grants of letters of administration.

There are two main types:

  • Grant of probate: Issued when the deceased left a valid will and appointed executors.
  • Grant of letters of administration: Issued when there is no valid will, or no executor is able or willing to act.

Key Term: grant of probate A grant issued to the executors named in a valid will, giving them authority to administer the estate.

Key Term: grant of letters of administration A grant issued to administrators (usually the next of kin) when there is no valid will or no executor able or willing to act.

Personal Representatives and Their IHT Duties

The person(s) named in the grant are called personal representatives (PRs). They have strict legal duties, including collecting the estate’s assets, paying debts and taxes (including IHT), and distributing the estate to those entitled.

Key Term: personal representative The person (executor or administrator) with legal authority to administer a deceased person’s estate.

PRs are personally liable for ensuring that IHT is correctly calculated, reported, and paid. If they fail to do so, they may be personally liable for any unpaid tax, interest, or penalties.

IHT Reporting and Payment Before the Grant

Before a grant of representation is issued, PRs must submit an IHT return to HMRC. The main forms are:

  • IHT205: For excepted estates (where no IHT is due)
  • IHT400: For estates where IHT is payable

Most IHT must be paid before the grant is issued. HMRC will not authorise the grant until payment is made or arrangements (such as an instalment plan) are in place.

IHT Deadlines

IHT on the death estate is due six months after the end of the month in which the death occurred. If payment is late, interest is charged.

Liability for IHT

The PRs are primarily liable for paying IHT on the estate. If they distribute the estate before IHT is paid in full, they may be personally liable for any shortfall.

Key Term: Inheritance Tax (IHT) A tax charged on the value of a deceased person’s estate above the nil-rate band, subject to exemptions and reliefs.

IHT Exemptions and Reliefs

Several exemptions and reliefs can reduce or eliminate IHT liability. The most important for estate administration are:

  • Spouse or civil partner exemption: Transfers to a spouse or civil partner are exempt from IHT.
  • Charity exemption: Gifts to UK-registered charities are exempt.
  • Nil-rate band: The first £325,000 of an estate is taxed at 0%.
  • Residence nil-rate band: An additional allowance when a home is left to direct descendants.
  • Business and agricultural property reliefs: Reduce the value of qualifying assets for IHT purposes.

Key Term: nil-rate band The threshold up to which an estate is not charged to IHT (currently £325,000).

Key Term: residence nil-rate band An additional IHT allowance for estates where a home is left to direct descendants.

Key Term: business property relief A relief reducing the value of certain business assets for IHT purposes, often by 100% or 50%.

Key Term: agricultural property relief A relief reducing the value of qualifying agricultural property for IHT purposes, often by 100% or 50%.

The Grant Process and IHT

Step 1: Valuation and IHT Return

PRs must value all assets and liabilities in the estate. They then submit the appropriate IHT form, declaring the value and claiming any exemptions or reliefs.

Step 2: Payment of IHT

If IHT is due, PRs must pay it (or the first instalment, if the instalment option applies) before the grant is issued. Payment is usually made directly from the deceased’s bank account or by a loan.

Step 3: Application for the Grant

Once HMRC confirms receipt of the IHT return and payment, the PRs can apply for the grant of representation. The court will not issue the grant unless HMRC has confirmed that the IHT position is settled.

Step 4: Estate Administration

After the grant is issued, PRs collect in the assets, pay debts and any remaining IHT, and distribute the estate.

Consequences of Errors or Omissions

If PRs fail to pay IHT, understate the value of the estate, or distribute assets before settling the tax, they may be personally liable for any unpaid tax, interest, and penalties. They may also face claims from beneficiaries or creditors.

Worked Example 1.1

Aisha dies leaving an estate valued at £700,000. She leaves everything to her children. The nil-rate band is £325,000, and the residence nil-rate band is £175,000. The remainder is subject to IHT at 40%. How much IHT is payable before the grant is issued?

Answer: The total nil-rate band available is £500,000 (£325,000 + £175,000). The taxable estate is £700,000 – £500,000 = £200,000. IHT at 40% is £80,000. This must be paid (or arrangements made) before the grant is issued.

Worked Example 1.2

Ben is the executor of his uncle’s estate. He submits an IHT400 showing a gross estate of £1,200,000, with £400,000 left to charity and the rest to his uncle’s children. What is the IHT position before the grant?

Answer: The £400,000 left to charity is exempt. The nil-rate band (£325,000) applies to the rest. The taxable estate is £1,200,000 – £400,000 – £325,000 = £475,000. IHT at 40% is £190,000. This must be paid before the grant is issued.

Exam Warning

If PRs distribute the estate before IHT is paid in full, they risk personal liability for any unpaid tax, interest, and penalties. Always ensure IHT is settled before making distributions.

Revision Tip

When revising, practise calculating IHT due before the grant, and remember to check for all available exemptions and reliefs.

Key Point Checklist

This article has covered the following key knowledge points:

  • The main types of grant of representation are probate (with a will) and letters of administration (without a will).
  • Personal representatives are responsible for valuing the estate, reporting to HMRC, and paying IHT before the grant is issued.
  • IHT must be paid (or arrangements made) before the grant is issued, except for certain instalment options.
  • Key IHT exemptions and reliefs include the spouse/civil partner exemption, charity exemption, nil-rate band, residence nil-rate band, business property relief, and agricultural property relief.
  • PRs are personally liable for IHT errors or omissions and must not distribute the estate before settling the tax.

Key Terms and Concepts

  • grant of representation
  • grant of probate
  • grant of letters of administration
  • personal representative
  • Inheritance Tax (IHT)
  • nil-rate band
  • residence nil-rate band
  • business property relief
  • agricultural property relief
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