Inheritance Tax may be payable following a death and the personal representatives (also known as the executors if there is a Will) who are dealing with the estate need to ensure that the tax is fully paid to the Inland Revenue before the estate is distributed to the beneficiaries. It is not uncommon for an executor to be put under pressure by beneficiaries to release funds from the estate as soon as monies are available, perhaps where they have their own financial pressures or are looking to purchase something with their inheritance within a particular timeframe.
The personal representatives are however, under a duty to collect all assets in the estate and ensure all debts, taxes and administration expenses have been paid before releasing funds to the beneficiaries. If the personal representative does distribute the estate too soon then they are personally liable for these expenses.
What can happen if personal representatives distribute an estate before the Inheritance Tax is paid?
The recent case of Harris v HMRC highlights the danger of distributing the estate to a beneficiary before the tax has been paid in full. In this case Mr Harris was a personal representative of an estate who agreed to transfer the money in the estate to the beneficiary when a property had been sold, on the understanding that the beneficiary would pay the Inheritance Tax for the estate. However, the beneficiary returned home to Barbados and Mr Harris has not been able to contact him. The Revenue have requested the tax is paid and would not accept Mr Harris’ defence that he no longer has the funds to pay the tax due. In this case the sum of £341,000 is owing to the Revenue and Mr Harris is personally liable to find the money to settle the tax.
Although it is often possible to make interim distributions to beneficiaries when funds become available, this should only be done if there are sufficient assets to meet the debts and taxes due in full. If you are acting as a personal representative in administering an estate it is vital to resist the temptation to distribute the estate too early and risk facing a hefty tax bill yourself.
For more information on inheritance tax or help distributing an estate, please contact Helen Gowin in our Estate Administration & Probate team on 01260 282351.