Lay Executors Beware!

March 31, 2016

The death of a loved one is an extremely distressing time for anyone, however the distress can be compounded for family executors trying to deal with the administration of a deceased’s estate themselves.

It is sometimes believed that if the estate is administered personally it will save on costs. This can prove to be a somewhat misguided notion, especially if a dispute arises between beneficiaries or the executor makes a mistake. Many executors do not know that they can be held personally liable for errors made in the administration of an estate. Mistakes can be as simple as missing an asset or returning an incomplete IHT form to HMRC.

The First-tier Tribunal (“the Tribunal”) in the case Usher and other v HMRC[1] recently ruled that a lay executors’ ignorance of legal procedure was not a special circumstance which would enable them to reduce a penalty for under-declaring the deceased’s income.

In this case, the executors appealed to the Tribunal against an assessment of income tax and a penalty for a deliberate under-declaration of the income tax due in relation to a deceased taxpayer. Although it was agreed that the tax had been under-declared, the executors said that this was partly due to the revenue’s delay in dealing with the return. The executors’ error, albeit careless, had been unintentional and the correct tax could have been paid had HMRC asked for it.

The executors explained that, as lay executors, they were unaware of the legal or accountancy procedures involved with administering an estate. While the revenue accepted that the error was not deliberate they argued that a penalty for carelessness should still be paid.

The tribunal decided that the lay executors’ ignorance of the legal and accountancy procedures when administering the estate did not, amount to special circumstances and held that they were liable to pay the penalty levied against the estate. The judges’ noted in their judgment that it was not the function of the tribunal or the revenue to relieve executors of the results of their choice to undertake the administration of the estate without professional advice. The executors had chosen to risk the consequences of any shortcoming in their legal and accountancy knowledge.

In this case the Tribunal took into consideration a number of other considerations including the revenue’s mistake in categorising the under declaration of tax as deliberate and its delay in dealing with the return. The Tribunal also considered that the executors would struggle to persuade the beneficiaries, as many were charities, to reimburse them from the distributions they had already received so that they may pay the correct amount of income tax. Taking these factors into consideration, the Tribunal reduced the penalty to zero, but this would not necessarily be the outcome in other similar cases.

The judges’ view of the executors’ ignorance of legal and accountancy procedures acts as a warning to those administrating estates without professional help. Should you be appointed to act as an executor, especially in large or complicated estates, it is worthwhile appointing legal professionals to advise on the legal formalities to ensure that you will not fall foul of the HMRC’s reporting procedures.

Should you wish to discuss any of the issues raised in this article then please contact the Private Client Department who will be pleased to advise you.