Will your client’s choice of executor mean more tax?

15 October 2015

How do your clients choose the executor(s) of their Will?

Being married to the will-maker is often the only qualification needed to secure an appointment! Otherwise it might be the person’s suitability to the demands of the role, or their willingness to act.

Tax efficiency is often overlooked. However, a will-maker’s choice of executor (and trustee of any trust incorporated within the Will) can sometimes make a big difference for UK taxes, so it’s good to understand how the rules of the game work.

Executors manage a deceased person’s assets (estate) and, during the estate administration, it may be necessary to sell estate assets, to create liquidity to pay debts or legacies, for example. The estate’s assets may also generate income. Executors are, in principle, subject to UK Capital Gains Tax (CGT) and Income Tax (IT) like any other taxpayer when they dispose of estate assets or receive income deriving from estate assets. Unlike other taxpayers, though, executors have fiduciary responsibilities to the beneficiaries of their estate, which, among other things, means minimising the estate’s tax liabilities in order to maximise the net estate available for the beneficiaries. Thus, every executor should have a tax adviser on speed dial!

For CGT purposes, if the deceased was non-UK resident, the executors of his Will will only pay CGT even if the asset being disposed of is UK situated (unless, for disposals after 6 April 2015, it is a disposal of UK residential property) and even if the executors are all UK resident! This is because executors are deemed to have the residence status of the deceased, regardless of their personal residence status. So executors of estates of Brits who die whilst working abroad, for example, can liquidate their entire UK investment portfolio free of CGT on any gains put on during the estate administration period if they wish (pre-death gains are wiped out on death).

Ideally, though, non-UK residents should steer clear of appointing any UK residents as executors of any Will dealing with their UK situated asset because:

  • if the Will creates a will trust, and the same people are both the executors and trustees of that will trust, the will trust will only be outside the scope of CGT if all the trustees are non-UK resident and if the deceased was non-UK resident but still UK domiciled at death; and
  • the IT rules for executors are less generous. If the deceased was non-UK resident at death but was still UK domiciled, the executors will pay IT on their worldwide income (as opposed to just UK source income) unless all the executors are non-UK resident.

It is important to work out early on if executors and will trustees are treated differently for CGT purposes. It would be disastrous if estate assets were transferred to will trustees (following an interim distribution or completion of the estate administration, for example), who then made chargeable disposals for CGT, if the executors were in a position to make CGT free disposals.

As long as this problem is spotted in time, it should be possible to save the day by UK resident will trustees retiring in favour of all non-UK resident trustees, or UK resident trustees simply not accepting the trusteeship if that will leave an all non-UK resident trustee line-up, but only if this happens before the estate administration ends. Leave it too late and, in a rising market, the trustees will have a CGT bill and some unhappy beneficiaries on their hands.

Helena Luckhurst Author
Helena Luckhurst
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