The case of Usher & Perkins v HMRC reported in the last few days contains a salutary warning for executors who choose to administer an estate without professional advice or assistance.
The Facts
In this particular case, the executors were left with personal liability for an income tax bill that they were unable to settle from the estate because they had already distributed the estate at the time the liability became known.
The estate of Mr Terence Guy who died in October 2012 was quite substantial being worth around £1.5 million. The executors applied for probate in February 2013 and as part of administering the estate submitted a tax return for the period to the date of Mr Guy’s death in August 2013. In September 2013 one of them sent HMRC a cheque for £15,332.92 representing what they believed to be the income tax liability due and accompanied this with a letter including the words:
“I will have to presume this is in full and final settlement, as I am now proceeding to finalise and distribute the estate.”
The executors had not published the statutory notices in the London Gazette which would have notified potential creditors that they intended to distribute the estate and which would have given the creditors a period of two months within which to lodge any claim.
Executors’ Liability
It later became apparent, following enquiries raised by HMRC in September 2014 that there had been an under declaration of the deceased’s income for the period to the date of his death and that an additional income tax liability of approximately £14,500 was due. In addition to this, HMRC endeavoured to impose a penalty of £5,060.18 on the executors for conduct that had been “deliberate but not concealed” which led to an under declaration of the deceased’s income.
First Tier Tribunal hearing
At the hearing before the First Tier Tribunal, it appears to have been accepted by all concerned that the tax liability of £14,500 or so was due. There was however a dispute as to whether the executors conduct could be construed as “deliberate” and therefore whether the penalty was payable. The executors also disputed HMRC’s claim for interest on the tax that was paid late.
The Tribunal decided that the tax liability and the interest that has accrued on it must be paid. It ruled that there was no right of appeal in respect of interest charges as they were a direct consequence of the fact that there was a late payment of the tax that was due.
The executors argued that they should receive some relief from the liability to settle the tax that was due as a result of what they perceived to be delay on the part of HMRC and the fact that HMRC were made aware of the fact that the executors intended to distribute the estate when they made their original payment of income tax.
However the tribunal was not prepared to relieve the executors of the personal liability to settle the tax liability and made the following comment:
“We bear in mind that, by taking on themselves the administration of an estate, the appellants chose to risk the consequences of whatever shortcomings in their legal or accountancy knowledge there might prove to be. It is not our function, or the Revenue’s obligation, to relieve the appellants of the results of their choice to undertake that work without professional assistance. The fact that ignorance of the procedure to guard against late claims left the executors vulnerable to the assessments made must therefore be disregarded, as must their inexperience in handling accounts – which doubtless led to the error.”
The executors had chosen to distribute the estate without waiting for a clearance letter from HMRC.
The general rule is the executors have a personal liability to settle any debts or liability that is properly due and payable from an estate that they are administering in as far as the estate is sufficient to meet that liability, whether the executors have retained sufficient assets to meet the liability in question or not. It is possible to obtain some protection from liabilities that are known to executors if they place the statutory advertisements inviting unknown creditors to come forward if they distribute the estate after the expiry of the two months time limit which those notices contain. If a creditor comes forward after the expiry of the time limit and the estate has been distributed then the creditor must seek payment of his liability from the beneficiaries of the estate directly.
Mr Guy’s executors did not place the statutory advertisements.
Therefore, in this case the executors were left in a position of having to seek to recover payments that they had made to beneficiaries to reimburse themselves for the tax liability. It is reported in the case report that they were experiencing some difficulty in recovering contributions from some of the beneficiaries.
Lessons for Executors
The case is a salutary warning to executors who choose to act in person without professional advice, that they cannot expect any “allowances” to be made by HMRC for their inexperience or any errors that they might make which might lead to an underpayment of tax being made, which may not be discovered until after the executors have distributed the estate.
The case arises against a backdrop of an increasing number of executors dealing with the administration of estates personally rather than employing professional assistance, on the pretext that there is a cost saving involved. In this particular case, any cost saving was likely to have been more than offset by the costs involved in dealing with HMRC’s claim and the potential that some of the beneficiaries may not refund their proportion of the tax liability that the executors have had to pay to them.
The executors of Mr Guy could have protected themselves had they for example:
- taken more care over the completion of the final tax return that was submitted to HMRC,
- placed the statutory advertisements for creditors;
- postponed the final distribution of the estate until they had received a letter of clearance from HMRC; and
- taken professional advice
If their decision not to take professional advice to assist them with the administration of the estate arose from a desire to save costs then this would appear to have been a false economy in this particular instance.
Ian Newcombe is a partner and leads the private client team in Exeter. If you would like to contact Ian please call 01392 210700 or email private.client.exeter@stephens-scown.co.uk.