Grants of representation - Inheritance Tax implications

Learning Outcomes

This article examines grants of representation and their Inheritance Tax (IHT) implications for SQE1, explaining the different types of grant, when each is required, and how they interact with the IHT charging provisions. It highlights the legal status and fiduciary duties of personal representatives (PRs), the distinction between liability to account for IHT and the ultimate incidence of the tax within the estate, and the principal exemptions and reliefs (including spouse/civil partner, charity, nil-rate bands, and business and agricultural property relief). It outlines the IHT reporting routes, key HMRC forms, and payment deadlines before a grant can be issued, together with the rules on instalment options, interest, and funding strategies such as the Direct Payment Scheme, loans, and asset sales. It also considers excepted estates, transferable allowances, and the reduced rate where 10% of a component is left to charity. Finally, it examines the practical and exam-critical consequences of errors or omissions, including late payment, undervaluation, incorrect allocation of the IHT burden, premature distributions, and the potential personal liability of PRs and their rights of recovery from those primarily liable.

SQE1 Syllabus

For SQE1, you are required to understand the interaction between grants of representation and Inheritance Tax, with a focus on the following syllabus points:

• 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
• the distinction between liability to account for IHT and the ultimate burden of IHT within the estate
• the instalment option for certain assets, and the reduced rate where 10% of the net estate is left to charity
• transferable nil-rate band and residence nil-rate band (including tapering of the latter for large estates)
• funding options to pay IHT pre-grant (including the Direct Payment Scheme) and HMRC forms typically involved

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. A practical appreciation of reporting routes (including excepted estates), payment timing, who is liable versus who ultimately bears the IHT, and how to fund IHT before the grant will help you recognise and solve common problems that arise in practice.

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.

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.

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.

Where there is a valid will but no executor able and willing to prove, the court may issue letters of administration with will annexed to a person entitled under the Non-Contentious Probate Rules (for example, a principal residuary beneficiary). This does not change the IHT position but affects who signs IHT forms and who is responsible for payment.

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. PRs owe a statutory duty of care to act with reasonable care and skill and, where professional, with the care expected of someone with that professional competence. They also work within the “executor’s year” concept, aiming to wind up the estate within about 12 months if practicable.

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, and for losses to beneficiaries caused by maladministration. They must ensure valuations are on an open market basis, applying the “loss to donor” principle for lifetime transfers when relevant, and they must retain adequate funds to meet tax due (including future instalments, if the instalment option is claimed).

IHT Reporting and Payment Before the Grant

Before a grant of representation is issued, PRs must submit an IHT return to HMRC and settle the IHT due or arrange an instalment plan where available.

For reporting:

• IHT205: Historically used for excepted estates where no IHT was due.
• IHT400: Used for estates where IHT is potentially payable or where the estate does not qualify as excepted. It is accompanied by schedules covering different asset categories and lifetime transfers.

Note: The excepted estates regime was modernised for deaths on or after 1 January 2022. The previous IHT205 route was largely replaced by new reporting criteria. However, the core principle remains: where the estate is excepted, a full IHT400 is not required unless HMRC requests it.

Key Term: excepted estate
An estate that meets specified conditions so that no full IHT account is required and no IHT is due (subject to HMRC request for a full account).

Where a claim to transfer an unused nil-rate band is needed in a non-excepted estate, PRs complete the IHT402 schedule. A claim for residence nil-rate band typically uses IHT436. For estates reported on IHT400, HMRC issues a summary for the Probate Registry known as IHT421.

Key Term: IHT400
The full inheritance tax account for estates that are not excepted, with schedules for different asset categories and claims.

Key Term: IHT421
The probate summary sent to the Probate Registry by HMRC once satisfied with the IHT position, enabling the issue of the grant.

Most IHT must be paid before the grant is issued. To facilitate payment, PRs obtain an IHT reference (usually via IHT422) and then fund the IHT using one or more of the following:

• using estate cash released under the Direct Payment Scheme
• beneficiary loans
• bank borrowing secured on estate assets or supported by undertakings
• sale of assets which can be realised pre-grant (for example, some quoted shares or chattels)
• insurance proceeds payable to the estate that an insurer pays directly to HMRC

Key Term: direct payment scheme
A voluntary scheme under which banks/building societies release funds from the deceased’s accounts directly to HMRC to pay IHT before the grant (using form IHT423 per account).

In exceptional cases, HMRC may allow the grant to be issued “on credit” where it is genuinely impossible to settle the tax in advance; the threshold to obtain this concession is high.

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 from that due date. Separate due dates apply for lifetime transfers:

• for chargeable lifetime transfers, IHT is due by the later of six months after the end of the month of the transfer and 30 April following the tax year of the transfer
• where lifetime transfers become chargeable on death (failed PETs or additional tax on CLTs), the extra tax is due six months after the end of the month of death

Key Term: instalment option
For certain assets (for example, land, a controlling shareholding, and relevant business or agricultural property), IHT can be paid in up to 10 equal yearly instalments; interest is charged on outstanding instalments, and the balance becomes due if the asset is sold.

Liability for IHT

The PRs are primarily liable for paying IHT on the free estate (property not held in settlement). However, the statute distinguishes between liability to account for IHT and the ultimate burden within the estate:

• PRs are liable to account for IHT attributable to the free estate; the default burden falls on residue unless displaced by the will.
• Trustees are liable for IHT on settled property in which the deceased had a qualifying interest; the burden falls on the trust fund.
• The donee is liable for IHT on a failed PET; if unpaid 12 months after the end of the month of death, HMRC can pursue the PRs.
• For property subject to the gifts with reservation rules, the donee is primarily liable; if tax remains unpaid 12 months after month of death, HMRC may pursue the PRs.

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.

Where PRs pay IHT for which another person is primarily liable, they generally have a statutory right of recovery. PRs must therefore identify lifetime transfers in the seven years before death (and earlier for cumulation in some cases), and they should reserve funds or ensure that those primarily liable can and will pay.

Key Term: estate rate
The average rate of IHT on the taxable estate, used to apportion the tax attributable to specific assets or components where needed (for example, calculating tax due on a specific legacy left “subject to tax”).

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 (subject to special limits for non-UK domiciled spouses unless an election is made).
• Charity exemption: Gifts to UK-registered charities are exempt; if 10% or more of a component of the net estate passes to charity, the rate on that component reduces from 40% to 36%.
• Nil-rate band (NRB): The first £325,000 is taxed at 0%. An unused NRB from a predeceased spouse/civil partner can be transferred to the survivor as a percentage uplift.

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

Key Term: transferable nil-rate band
The unused percentage of a predeceased spouse/civil partner’s NRB that can be claimed to increase the survivor’s NRB (up to an additional 100%).

• Residence nil-rate band (RNRB): An additional allowance (maximum £175,000) where a qualifying residential interest is closely inherited by direct descendants. It tapers away for estates exceeding £2 million and is transferable between spouses/civil partners. It applies to the death estate only; there is a downsizing mechanism if the home has been sold or downsized.

Key Term: residence nil-rate band
An additional IHT allowance for estates where a home is left to direct descendants; it is tapered for larger estates and is transferable if unused.

• Business and agricultural property reliefs: Reduce the value of qualifying assets for IHT purposes, often by 100% or 50%. Qualifying businesses must generally be trading (not wholly or mainly investment).

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%.

Anti-avoidance rules also affect the charge:

• Gifts with reservation of benefit bring an asset back into the death estate if the donor retained a benefit at death (subject to exceptions such as paying full market rent).
• The pre-owned assets income tax regime may apply where a donor seeks to avoid the reservation of benefit rules by indirect routes.

Key Term: gift with reservation of benefit
A lifetime gift where the donor retains a benefit; the gifted asset is treated as part of the death estate unless the reservation is fully given up before death.

Key Term: pre-owned asset tax
An income tax charge that can apply where former owners continue to benefit from assets they previously gave away and the gift with reservation rules do not apply.

Other reliefs of note in administration include Quick Succession Relief, which can reduce double taxation where an asset passes through two estates within five years.

Key Term: quick succession relief
A relief reducing IHT where property has suffered IHT in the previous five years and is taxed again on another death in that period.

The Grant Process and IHT

Step 1: Valuation and IHT Return

PRs must value all assets and liabilities in the estate on an open market basis at the date of death, including jointly owned assets (for IHT, the deceased’s beneficial share is included) and items passing outside the will but within the IHT computation (for example, gifts with reservation of benefit, life interests in settled property). They then submit the appropriate IHT form, declaring the value and claiming any exemptions or reliefs. If the estate is excepted, a full account is not routinely required unless HMRC requests one.

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 using:

• the Direct Payment Scheme (IHT423) for UK banks/building societies
• a short-term loan from a beneficiary or a bank
• realising assets that can be sold pre-grant
• in rare cases, by obtaining the grant on credit

Step 3: Application for the Grant

Once HMRC confirms receipt of the IHT return and payment (or an instalment arrangement), HMRC provides the Probate Registry with IHT421. The court will not issue the grant unless HMRC has confirmed that the IHT position is settled to this stage.

Step 4: Estate Administration

After the grant is issued, PRs collect in the assets, pay debts and any remaining IHT (including future instalments or interest), and distribute the estate. They should also consider:

• filing corrective accounts where values or liabilities change materially
• seeking an IHT Certificate of Discharge to reduce risk of later HMRC challenge, where appropriate
• apportioning the burden of IHT correctly among beneficiaries, bearing in mind the default incidence (residue bears the tax unless the will provides otherwise)

Key Term: certificate of discharge
HMRC confirmation (IHT30) that no further IHT is due on the estate, subject to exceptions such as fraud, non-disclosure, discovery of new assets, or subsequent variations.

PRs must also manage income tax and capital gains tax (CGT) during administration. PRs are taxable on estate income (generally at basic/dividend ordinary rates and without personal allowances) and on gains (probate value is the base cost; PRs get the annual exempt amount only for the year of death and the next two tax years). If PRs borrow to pay IHT, interest on a qualifying loan used to pay IHT on personalty vesting in them can be deductible against estate income within limits.

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. In practice, PRs should:

• avoid distributing within six months of the grant if there is a realistic risk of an Inheritance (Provision for Family and Dependants) Act 1975 claim
• withhold sufficient funds for future IHT instalments and interest
• consider advertising for creditors and obtaining HMRC discharge where appropriate
• ensure that any tax for which another party is primarily liable (for example, on failed PETs) is secured or recoverable before distributing

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.

Worked Example 1.3

Dina dies with a taxable estate of £900,000 after exemptions and reliefs. Part of the estate comprises a let commercial property worth £500,000 qualifying for the instalment option. The PRs elect to pay the IHT attributable to that property in ten instalments. Assume no RNRB and a single NRB of £325,000. How much can be deferred?

Answer:
Taxable amount = £900,000 – £325,000 = £575,000 at 40% = £230,000 total IHT. Apportion by value to identify tax attributable to the instalment asset: £500,000/£900,000 = 55.56% of the total charge. So IHT attributable to the property ≈ 55.56% × £230,000 ≈ £127,788. Subject to HMRC confirmation, that amount may be paid in up to ten instalments; interest is charged on outstanding instalments, and any remaining balance becomes immediately due if the property is sold.

Worked Example 1.4

Gordon dies with a general component of £500,000 after deducting debts, reliefs and exemptions (other than charity). He wishes to benefit a charity and his niece. How large must the charitable legacy be to qualify the general component for the 36% reduced rate?

Answer:
The “baseline amount” for the component is £500,000 less any available NRB allocated to that component. If the full £325,000 NRB is available and allocated pro rata, assume for simplicity that the NRB is fully allocated to this component (to illustrate the mechanism). Baseline = £500,000 – £325,000 = £175,000. A charitable gift of at least 10% of £175,000 (£17,500) will secure the 36% rate on the taxable part of that component. In practice, the NRB is apportioned across components; PRs must compute the baseline precisely before concluding the minimum 10% gift.

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

Practise calculating IHT due before the grant, check transferable allowances (NRB and RNRB), consider the instalment option for relevant assets, and be ready to distinguish between who is liable to account for IHT and who ultimately bears it.

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, or where no executor can act).
• Personal representatives are responsible for valuing the estate, reporting to HMRC, and paying IHT before the grant is issued; they owe a duty of reasonable care and skill.
• IHT must be paid (or arrangements made) before the grant is issued, except where the instalment option applies to qualifying assets.
• Key IHT exemptions and reliefs include the spouse/civil partner exemption, charity exemption (with a possible 36% rate where 10% of a component passes to charity), nil-rate band, residence nil-rate band (with tapering for large estates), business property relief, and agricultural property relief.
• Excepted estates reduce reporting requirements, but HMRC can still require a full account; use of forms includes IHT400 with schedules, IHT421 for probate, and IHT423 for direct payment.
• Liability to account for IHT differs from the burden of tax within the estate; by default, residue bears IHT unless the will directs otherwise; the estate rate can be used to apportion tax.
• PRs can fund pre-grant IHT via the Direct Payment Scheme, loans, asset sales, or in rare cases by obtaining the grant on credit.
• PRs must consider corrective accounts, interest on late payment, and may obtain a certificate of discharge; errors can lead to personal liability.
• PRs are also responsible for income tax and CGT during the administration period; probate value is the CGT base cost and PRs have limited annual exemptions.
• Anti-avoidance rules (gifts with reservation, pre-owned assets) can bring property into charge; donees of failed PETs or recipients of reserved gifts may be primarily liable, but PRs can be pursued if sums remain unpaid after 12 months.

Key Terms and Concepts

• grant of representation
• grant of probate
• grant of letters of administration
• personal representative
• Inheritance Tax (IHT)
• nil-rate band
• transferable nil-rate band
• residence nil-rate band
• business property relief
• agricultural property relief
• excepted estate
• IHT400
• IHT421
• direct payment scheme
• instalment option
• estate rate
• gift with reservation of benefit
• pre-owned asset tax
• quick succession relief
• certificate of discharge