End of the affairs
On a purely practical level, the administration period of a deceased’s estate comes to an end when the personal representatives have completed all of their administrative tasks, such as identifying and valuing the assets of the estate, paying the liabilities and legacies, and distributing the residue.
In the income tax legislation the administration period is defined as the period from the date of death until the ‘completion of the administration of the estate’ (CTA 2009 s938(1)). There is no statutory provision determining when ‘completion’ takes place.
HMRC in fact look to an early date for completion of the administration. The key question is put by Lord Hanworth MR in Commissioners of Inland Revenue v Sir Aubrey Smith  1 KB 713: ‘[h]as the administration of the estate reached that point of ripeness at which you can infer an assent, at which you can infer that the residuary estate has been ascertained and that it is outstanding and not handed over merely for some other reason?’ (CG30700.)
HMRC regards ‘completion’ as being on the date on which the residue is ascertained, and to avoid confusion HMRC prefers to refer to the ‘ascertainment of residue’ rather than the vaguer term ‘completion of the administration’. According to HMRC, residue is only ascertained when the personal representatives have both established the net worth of the estate and provided the liquid funds to pay liabilities and pecuniary legacies (CG30810).
For tax purposes, a line can be drawn before and after the ascertainment of residue. Income and gains arising before that date are taxable on the personal representatives and after that date on the beneficiaries themselves, in proportion to their entitlements.
In practice, personal representatives may not always follow HMRC’s interpretation. They may, for example, fix on a date for completion of the administration that is later than the date on which residue has strictly been ascertained (for example, the date on which the accounts are finalised) and so continue to treat income arising after that date as having arisen during the administration. HMRC is unlikely to challenge this if there is no tax at stake, and this is usually the case, since the beneficiaries will ultimately be liable for the income tax due, with a credit for the income tax paid at basic rate paid by the personal representatives or deducted at source.
Capital gains tax
The position with capital gains tax (CGT) may not be so straightforward, save that HMRC is unlikely to contend that a disposal is made on behalf of the beneficiaries if it takes place during the executor’s year (CG30820). Before ascertaining residue, personal representatives making disposals will be liable for any CGT, with the full annual exemption that individuals have (GBP10,600 in 2012/13) for the year of death and the subsequent two tax years. If, on the other hand, the personal representatives have used their CGT exemption and want to make disposals on behalf of beneficiaries so as to use the beneficiaries’ individual CGT exemptions, they must vest the assets in the beneficiaries. The personal representatives can then make disposals at the beneficiaries’ direction as bare trustees. After the ascertainment of residue, however, HMRC will treat disposals as being made on behalf of the beneficiaries, even if made by the personal representatives. HMRC is particularly vigilant where a date for the completion of the administration is chosen that is not consistent with the date the residue is ascertained if this would result in less CGT being payable – for example, to take advantage of a beneficiary’s lower rate of CGT of 18 per cent (where this applies rather than the higher rate of 28 per cent) or of their annual exemption from CGT.
Once residue is ascertained, HMRC usually considers that beneficial ownership vests in the beneficiaries. If the personal representatives wish to use any unused annual CGT exemption for the tax year in question, they therefore ought to do so before HMRC confirms that all the inheritance tax has been paid and before they provide the funds to pay liabilities and pecuniary legacies. There may also be more sophisticated CGT planning that it is crucial to undertake before residue is ascertained, so it is important that the personal representatives are aware of when HMRC will regard the estate administration as having been completed.
This is illustrated by the extreme circumstances in the Sir Aubrey Smith case mentioned above. Sir Aubrey Smith was one of the executors appointed by his father, Hugh Colin Smith, who died in 1910. The executors continued to run the deceased’s businesses and estates for more than a decade and in 1924 claimed that the estate was still in the course of its administration because the residue had not been ascertained. Particular reliance was placed on the fact that mortgage debts were outstanding. The court found that ‘the device of leaving a debt unpaid [may be] resorted to in order to pretend that the residue of an estate has not been ascertained and is not ascertainable. If such a device were resorted to in any case it ought to be held ineffective’.
For these reasons, HMRC does not accept that the quantification of the final professional fees, such as those of a solicitor or professional employed in dealing with the administration of the estate, can extend the administration period (CG30790).
This is a regular column supporting the STEP Diploma in Trusts and Estates (England and Wales) syllabus. For more on this and other STEP qualifications, go to www.step.org/pd
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