DISTRIBUTION IN ACCORDANCE WITH THE LAWS OF INTESTACY

If someone dies without making a will he is said to die intestate and his estate is inherited according to intestacy law. A few general points first:

Intestacy law divides relatives into groups or classes according to their blood relationship to the deceased, e.g. children, siblings, grandparents, etc. All members of a given class inherit in equal shares. If a member of one class has died before the deceased and leaves issue who survive the deceased, the issue inherit the share which their predeceasing parent would have inherited had he survived, equally between them. There is a specific order in which the various classes inherit and if all members of a given class have died before the deceased without leaving issue who survived the deceased, the next class inherits. The words ‘child’ and ‘children’ are used to mean a person’s immediate descendants (as opposed to grandchildren) and do not include a stepchild or stepchildren, but no distinction is made between legitimate and illegitimate children. Adopted children inherit from their adoptive parents and not from their natural parents.

The word ‘issue’ is used to include children and/or grandchildren. If those entitled to inherit are under the age of 18, the inheritance is held in trust for them until they either reach the age of 18, marry or enter into a registered civil partnership under that age. Net estate means the estate after deducting all debts, liabilities, inheritance tax and funeral and testamentary expenses.

To decide who is entitled to inherit, look for the first class and if there is no member of the class who survived the deceased or predeceased him leaving issue who survived him, move on to the next class.

The first person to have a claim on the estate is the surviving spouse or registered civil partner, and the amount to which he or she is entitled depends upon the size of the estate and whether or not there are any surviving issue or certain other close relatives. If the spouse or partner survived, but for a period of less than 28 days beginning on the day on which the intestate died, the spouse or partner is considered to have not survived the intestate.

• If the deceased left a surviving spouse or registered civil partner but no issue and no parent, brother or sister of the whole blood or issue of a brother or sister of the whole blood, the surviving spouse or partner inherits the entire estate.
• If the deceased left a surviving spouse or civil partner and issue or any of the specified relatives, the surviving spouse or partner is entitled to the deceased’s personal chattels, i.e. moveable items such as sporting trophies or motor car, but personal chattels does not include items used in any business e.g. a delivery van.

The surviving spouse or civil partner is also entitled to a fixed sum of money known as a statutory legacy and interest on the statutory legacy until payment at the rate of 6 per cent from the date of death.

If the deceased is survived by issue the spouse’s or partner’s statutory legacy is £125,000. If there are no surviving issue but there is a surviving parent, brother or sister of the whole blood surviving, or issue of a brother or sister of the whole blood who died before the deceased, the legacy is £200,000.

The surviving spouse or civil partner is further entitled to one half of what is known as ‘the residuary estate’ i.e. what remains of the net estate after deducting the personal chattels and the statutory legacy. If there are surviving issue, the surviving spouse or partner is entitled to the share of the residuary estate only during his or her lifetime, but if there is no surviving issue, then the surviving spouse or partner is entitled to the share for his or her use and benefit absolutely. Where the spouse or partner is only entitled to the half share of the residuary estate during his or her remaining lifetime, because it has to be left for those who are entitled to inherit it after his or her own death, the spouse or partner can only spend the income that share produces and cannot spend the capital sum represented by the share. Where the spouse or partner is entitled to the share for his or her own use and benefit absolutely he or she can, of course, dispose of both the capital and income as he or she wishes.

A surviving spouse or registered civil partner is entitled to require the personal representative to use the residuary estate to purchase his interest for life in the one half share of the residuary estate from him. To do so he must give notice of the requirement within 12 months to the administrators of the estate, or if he is the only administrator, to the Senior Registrar of the High Court. If the matrimonial home is freehold or leasehold with at least two years of the lease unexpired at the date of death, the spouse or partner can also insist, within a year of the issue of the grant of representation, upon using his share of the residuary estate to buy the matrimonial home, paying any difference in value in cash. The purchase price is the value of the home at the date of the acquisition, not the value at the date of death. In cases where the matrimonial home:

• is part of a building or agricultural estate contained in the residuary estate; or
• used in part or entirely as a hotel or lodging house; or
• in part for other than domestic purposes,

the right cannot be exercised unless a court is satisfied that it is not likely to diminish the value of the other assets in the residuary estate or make them more difficult to dispose of.

• If the deceased left a surviving spouse or registered civil partner and issue, the issue inherit one half of the residuary estate on the deceased’s death and the other one half of the residuary estate after the death of the surviving spouse or civil partner as the case may be.
• If the deceased left a surviving spouse or registered civil partner and no issue, the one half share of the residuary estate not inherited by the surviving spouse or partner absolutely is inherited by the deceased’s parent if one survives him, or if no parent has survived, by brothers or sisters of the whole blood and issue of deceased brothers and sisters of the whole blood, the issue of the deceased brothers or sisters inheriting equally between them the share which their deceased parent would have taken had he survived.
• If the deceased left no surviving spouse or civil partner but left issue the net estate is inherited by the issue.
• If the deceased left no surviving spouse or civil partner and left no issue but left a parent or parents, the net estate is inherited by the parent(s), and if both, then by them equally.
• If the deceased left no spouse, civil partner, issue, or parent, the net estate is inherited by the following classes of people living at the death and in the following order so that if there is no-one in a class living at the death the subsequent class inherit viz. brothers and sisters of the whole blood, or if none, brothers and sisters of the half blood or if none, grandparents or if none, uncles and aunts of the whole blood or if none by uncles and aunts of the half blood.
• If the deceased was survived by none of the above the Crown, the Duchy of Cornwall or Duchy of Lancaster inherits the estate.

A person is considered to be a spouse for the purposes of the laws of intestacy until a decree absolute (not a decree nisi) of divorce or a judicial separation (other than in the magistrates’ court) has been pronounced, and to be a civil partner from when the partnership is registered until it is dissolved.

TO WHOM SHOULD DISTRIBUTIONS BE MADE?

Children conceived by artificial insemination or in vitro fertilisation

When distributing to those known to have been conceived by artificial insemination or by in vitro fertilisation the following rules should be kept in mind.

Except for inheritance of titles, and land which devolves with titles, if a child is artificially conceived (i.e. as a result of artificial insemination or in vitro fertilisation):

• in the case of a couple who are married and not judicially separated, the husband is considered to be the father unless it is proved that he did not consent to the conception;
• in the case of treatment provided for a man and woman together, the man is considered to be the father irrespective of whether or not his sperm was used;
• the mother is the woman who has carried the child as the result of the placing in her of an embryo or of an egg or sperm.

Although The Human Fertilisation and Embryology (Deceased Fathers) Act 2003 permits a deceased husband or partner to be registered as the father of a child conceived after his death by the use of his sperm, the registration does not give the child any rights of inheritance. (The reason for the rule is to avoid delay in the winding up of estates.)

Underage beneficiaries

Unless permitted to do so by the will, neither a person under the age of 18 nor that person’s parent or guardian can give a valid receipt for the capital of a bequest (as opposed to the income it produces) and consequently neither can give a valid discharge for any capital payment made to him. A valid receipt for income produced by a bequest to a person who is under the age of 18 can only be given by the person, or his parent or guardian, if the beneficiary is married or in a registered civil partnership. Accordingly a personal representative should not make any capital payment to a minor, or any income payment to an unmarried minor who is not in a registered civil partnership, unless authorised by the will and should either retain the sum due in the personal representative’s name on behalf of the underage beneficiary until the beneficiary becomes of age, or arrange for it to be paid into court.

If the bequest is retained in the personal representative’s name, it should be invested in authorised investments and be designated as in respect of the beneficiary to avoid the possibility of the investments being confused with the personal investments of the personal representative.

Authorised investments are those authorised by the will or other document creating the trust and in addition those permitted by Part II (sections 3–7) of the Trustee Act 2000. The Act gives trustees and personal representatives (who will for the purpose of conciseness both be referred to in this section as ‘the trustee’) the same powers to invest money as they would have if they owned the monies themselves, but also provides that:

• any restrictions or other provisions contained in the will or other document creating the trust, if dated after 3 August 1961, must be complied with;
• the trustee has a duty to use such skill and care in the choice of investments and advisers as is reasonable, bearing in mind any special knowledge, experience and professional skill of the trustee and the nature and purpose of the trust;
• in the choice of investments a trustee must bear in mind the need for diversification, i.e. he must not put all the eggs in one basket;
• the investments should be kept under review with a view to deciding whether or not they should be varied; and
• unless it is not appropriate that they should do so or unnecessary, trustees should obtain and consider proper advice as to how the power of investment should be exercised and the suitability of the investments to the trust. It might not be appropriate to take advice if, for example, the trustee himself has the necessary investment skills and knowledge, or if the cost of the advice would be out of proportion to the value of the investments.

Persons of unsound mind

Similarly, if a bequest has been made to a person who is not believed to be of sound mind, the bequest should not be paid to that person personally but to his receiver or to his attorney appointed under lasting power of attorney executed before the beneficiary lost his sanity.

Bankrupts

Payment should not be made to a beneficiary who is bankrupt, and the same points as are noted above on p. 105 in relation to payment of debts to bankrupts apply to payments of entitlements to bankrupt beneficiaries. Before distributing assets check that creditors and beneficiaries are not bankrupt by making a search against their names at the Land Charges Registry on Land Registry form K16 at a current fee of £1.00 for each name searched.

Beneficiaries who cannot easily be found

If executors do not personally know a beneficiary’s current address, enquiry through persons mentioned in the deceased’s address book will sometimes provide the required information. If it does not, then try publishing the statutory advertisement for claimants and creditors referred to on page 92. The addresses of local newspapers can be found by consulting Willing’s Press Guide in the reference department of a library or the websites www.wrx.zen.co.uk/norpress.htm and www.wrx.zen.co.uk/soupress.htm.

If the general area in which the missing beneficiary lives is known, a search for the name in the telephone directory or electoral register might find the beneficiary or a member of the family, who will enable contact to be made. Remember to search for married female beneficiaries in both their maiden and married names. A copy of a married woman’s marriage certificate, obtainable from the General Registry Office and viewable on the Family Records Centre, will give her maiden name and a lead to the maternal side of the missing beneficiary’s family. However, it is possible for a telephone subscriber to elect to be ex-directory and for a registering elector to opt for non-disclosure of the entry contained in the electoral register. If the beneficiary is on the electoral register but has elected for non-disclosure there is the possibility that the local authority will forward a prepaid letter to the relevant address. If the telephone subscribers are not ex-directory their numbers can be searched for on line at www2.bt.com/edq_resname-search.

The Traceline team at The Office for National Statistics (telephone 01514 714811, website www.gro.gov.uk/gro/content) will also trace and forward a letter to anyone who is registered with a National Health Service General Practitioner in England or Wales if the executor can supply the person’s name and date of birth. A fee is payable and Traceline can also inform the executor if the beneficiary has died.

Indices of births, adoptions, deaths and marriages from 1837 which may be required can be seen at the Family Records Centre (www.familyrecords.gov.uk/frc) and copy certificates obtained from the General Registry Office (www.gro.gov.uk). Copy probates, Letters of Administration and wills can also provide much useful information. They can be obtained for a modest fee from the Principal Probate Registry.

Professional genealogists and tracing agencies may be employed if the sum involved is large enough to justify the cost, and if all fails the deceased’s will should be checked to see if it contains directions as to whether the contingency is provided for. If it does not a solicitor should be instructed to pay the bequest into court or to make an application to a court for directions as to what further should be done.

THE TRANSFER OF CHATTELS

Unless the will provides to the contrary, the cost and risks of delivering a chattel, i.e. a moveable object, to a beneficiary to whom it has been bequeathed, for example the cost of insurance, packing, and transportation, must be borne by the legatee and not by those entitled to the residue of the estate.

If a chattel which has been bequeathed to a specific legatee is not required for the payment of debts or expenses to be incurred in the administration of the estate, the personal representative is under no duty to take other than routine steps to recover it. Thus in the case of Re Clough-Tayor deceased, Coutts & Co. V. Banks and Others, the court decided that executors were under no duty to litigate to recover a chattel that had been taken by a third party following the death of the testatrix and which was not needed for payment of debts or expenses to be incurred in the administration of the estate. The court decided that the executors need do no more than transfer the right to the chattel to the beneficiary in writing.

TRANSFERRING BUILDINGS OR LAND

Leasehold property is special in that the lease under which the property is held sometimes contains provisions requiring the death certificate, probate or letters of administration and a copy of any transfer of the lease to a beneficiary, to be registered with (i.e. produced to), the landlord within specified time limits so that the landlord is kept aware of the identity of his tenant and a fee to be paid to the landlord for the landlord’s trouble. In theory failure to register the document with the landlord could result in loss of the lease so the matter should not be overlooked.

When transferring leasehold property care must also be taken to check whether or not there are any outstanding liabilities such as arrears of ground rent or dilapidations under the lease, and reference should be made to the will to decide who should bear them. A personal representative transferring leasehold property to a beneficiary should ensure that the transfer deed contains a provision by the beneficiary to indemnify the personal representative against existing and future dilapidations in respect of the property and to observe and perform the terms of the lease in the future.

Properties have either a registered title or an unregistered title and if the title is not already registered it is necessary to register it whenever a change of ownership takes place, unless the property is leasehold and there is less than seven years before the lease expires.

A registered one is one which has been investigated by The Land Registry and in respect of which The Land Registry has issued one of the following title documents: a Title Information Document, a Land Certificate, or a Charge Certificate. Such documents certify and guarantee the quality and details of the title as at the time they were issued.

If there is no such document with the title documents, it is virtually certain that the title is an unregistered one, but the position must be checked by submitting a search of the Index Map to the relevant District Land Registry. Such a search is free unless more than ten titles are involved, in which case the current fee is £4 for each additional title. In the case of an exceptionally large area of land the Registry can charge an additional fee to reflect the amount of work involved.

The search can be done by post on Land Registry Form number SIM.

Land Registry forms and a note of relevant Land Registry fees can be obtained from The District Land Registry, from a Law Stationer, or downloaded for private use from the Land Registry’s website www.landregistry.gov.uk.

The name and address of the relevant District Land Registry appears in the Land Registry document evidencing title and can also be obtained from The Land Registry website.

If the title is not a registered one and the property is to be transferred to a beneficiary or sold, it is necessary to ask The Land Registry to register it, unless the property is leasehold and there is less than seven years before the lease expires.

Preparation of an application to register a title can only be safely done by someone with a considerable knowledge of property law and is best done by a solicitor.

If the title has previously been registered in joint names, on the death of one of the registered owners it is necessary to send a registrar’s copy of the death certificate, or official copy of the grant of representation to the estate to the District Land Registry, where the title is registered and quote the title number so that the death can be noted on the registers of the title. No fee is payable.

In any other case, unless the Personal Representatives sell the property and transfer it directly to the purchaser, giving the proceeds to the beneficiary entitled to inherit it (which is the cheaper and quicker course) it will be necessary to prepare a transfer of the property to the beneficiary entitled on the death (or to the trustees of the trust, if a trust comes into existence as a result of the death). The transfer must be registered with The Land Registry and the Land Registry’s transfer fee which is based upon the value of the property must be paid.

If the property was owned by one person before his death and does not have a registered title it is better to ask a solicitor to transfer the property and register the transfer and title at the Land Registry at the same time. If the property already has a registered title and is to be transferred to a beneficiary after the death, it is a simple matter to effect the transfer which is done on a Land Registry form number AS1 or AS3. Form AS1 is used if the entirety of the property is to be transferred and form AS3 if only part of the property is to be transferred. The forms should be sent to the relevant District Land Registry with an official copy of the grant of representation, a completed Land Registry Form AP1, and the appropriate Land Registry fee payable by cheque or postal order to ‘Land Registry’. If the applicant is aware that the property is occupied by someone other than the beneficiary to whom the property is being transferred, or that there has been any transaction after the date stated on the Land Registry title document, or which is not referred to on the reply to the Search of the Index Map (which transaction affected the property), the applicant cannot safely complete the first box in section 10 of form API and should seek assistance from a solicitor or licensed conveyancer. If the applicant is not aware of any such matters he can tick the first box in section 10 and ignore the second box.

The amount of the relevant fees payable to the Land Registry and the Land Registry forms can be obtained from the Registry or downloaded for private use from the Land Registry website.

If registered land is mortgaged, when the mortgage is paid off, the lender will either notify the Land Registry electronically that the mortgage has been paid off, or supply the person to whom it sends the deeds with an acknowledgement that the mortgage has been paid off in the form of a completed Land Registry Form DSL To remove the reference to the mortgage from the property title the form of application which is on the back of Form DS1 should be completed and sent to the relevant District Land Registry with a completed Form API or DS2 and the original Grant of Representation to the estate. No fee is payable.

The Land Registry website includes an online enquiry form and a section of frequently asked questions and answers.

TRANSFERRING SHARES OR STOCK

The steps to be taken are described on page 102.

CAPITAL GAINS TAX AND INCOME TAX EARNED DURING THE ADMINISTRATION PERIOD

If the estate assets rise in value between the date of death and the date they are transferred to beneficiaries or the date they are cashed or, if they produce income, the personal representatives and the estate must account to the Revenue for any chargeable Income and Capital Gains Tax.

Capital Gains Tax

Personal representatives are entitled to the deceased’s personal Capital Gains Tax exemption limit in the tax year in which death takes place and in the two tax years which follow death. Assets which have a large capital gain should therefore usually be dealt with by transfer to beneficiaries or sale within three years of death, if possible, although careful consideration of the amount of the gain with which each asset is pregnant, the taper relief applicable to it and spacing of sales over the three tax years can prove advantageous. When deciding whether to sell assets or transfer them to the beneficiaries and let the beneficiary sell them, the personal representative should take into account the beneficiary’s views and Capital Gains Tax position and the current Capital Gains Tax rates for individuals and for personal representatives, with a view to acting in the way which will prove to be the more favourable. The personal representative’s Capital Gains Tax exemption and that of the beneficiary are independent of each other; careful use of both of them can achieve considerable tax savings if the gains since death are large.

Losses which occur in the year of death can be carried back for Capital Gains Tax purposes and used to reduce gains which occurred in the three years which preceded death.

When Personal Representatives or beneficiaries sell or dispose of assets inherited from an estate then for Capital Gains Tax purposes when calculating the gain, they are allowed to add to the base cost (i.e. the cost at which they are deemed to have acquired the relevant asset), a proportion of the legal and other expenses involved in preparing the Inland Revenue account and obtaining the grant of probate.

Because it is difficult to ascertain exactly how much of the total expense relates to any particular asset a scale (known as ‘The Richards Scale’) is usually accepted. The scale used for deaths which take place after 5 April 1993 is:

Gross value of the estate for IHT purposes	Sum allowed
(a) Up to £40,000	1.75 per cent of the probate value of the asset.
(b) £40,001 – £70,000	£700 divided proportionately between the estate assets according to their probate values.
(c) £70,001 – £300,000	1 per cent of the probate value of the asset.
(d) £300,001 – £400,000	£3,000 divided proportionately between the estate assets according to their probate values.
(e) £400,001 – £750,000	0.75 per cent of the probate value of the asset.

Also bear in mind that if assets are re-valued for Inheritance Tax purposes to reflect a fall in value between the date of death and the date they are transferred to the beneficiary or sold, then for Capital Gains Tax purposes the reduced value becomes the base cost value (i.e. the value at which the asset is deemed to have been acquired by the beneficiary) and before deciding to elect for an Inheritance Tax revaluation, check whether Inheritance Tax and Capital Gains Tax are at the same rates at the relevant time.

When passing a bequest to a beneficiary a Personal Representative should retain a sufficient sum from the bequest to meet any potential Capital Gains Tax liability if the Capital Gains Tax position has not been finally agreed with the Revenue.

Income tax

Income is taxed in the hands of the personal representatives on the basis of the tax year in which it is due and not the tax year in which it is actually received; it is not apportioned over the period before and the period after death. The personal representatives are entitled to set against the gross income they receive from the administration of the estate during a tax year any interest they pay during that tax year on loans they have taken out to finance the payment of inheritance tax.

Some of the income earned by assets of the estate between death and distribution of the estate may have been taxed at source (i.e. before it was paid to the estate), but other income such as rent and interest on a company debenture is paid to the personal representatives without any deduction of tax. This is taxable at the standard rate in the hands of the personal representatives to whom no personal allowances are available.

Each beneficiary must include his share of the income of the estate earned between death and distribution of the estate in his tax return, but he is entitled to credit for tax paid by the personal representatives on the share. Beneficiaries who are not liable for income tax can reclaim tax which has been deducted at source or which has been paid by the personal representatives in respect of the beneficiary’s share of income. Higher rate tax-payers are liable for the difference between the standard and higher rates of tax.

To enable the beneficiaries to deal with the tax and income, the personal representatives must complete for each beneficiary affected a short form (number R185E, obtainable from the local Income Tax Office) which will show the beneficiary’s share of the tax and the income.

FINAL ACCOUNTS

Finally, before distributing the estate to the beneficiaries, the personal representative would be well advised to get accounts approved by the residuary beneficiaries and to get a form of receipt and discharge from all the beneficiaries. If the beneficiaries will not sign the form of discharge the personal representatives can make an application for a formal discharge to a court.

It should be noted here that an executor is not entitled to charge for the work he has done or the time he has expended in connection with the estate unless the will provides to the contrary, but he is entitled to be reimbursed for out-of-pocket expenses he has incurred.

A suitable form of account and receipt for the estate outlined on pages 70 and 71 might be as follows:

Before submitting the accounts for the approval of the beneficiaries, care should be taken to reconcile the accounts with the bank statements by ensuring that the balance of the Cash Account, after making allowances for anything transferred to beneficiaries without being turned into cash, agrees with the final sum withdrawn from the bank account. If it does not there must be an error in the bank statement or, more likely, an omission from or other error in the estate accounts.