Executors’ and Administrators’ personal liability

If an estate is insolvent, then as long as the correct procedure is adopted and the estate is managed carefully, personal representatives should not face any personal liability. This was dealt with in an earlier article published by Monika Byrska of this office.

However, if the personal representatives have paid out money, but failed to pay out some of the liabilities due, then they might have to pay that liability themselves. If all the money has gone then they may not be able to claim that money back from the estate or the beneficiaries.

This unfortunate event is most commonly seen in relation to unpaid Inheritance Tax. The Inheritance Tax Act 1984 section 40 provides that, with limited exceptions, the deceased’s personal representatives are personally liable for the Inheritance Tax payable on the death estate. If they fail to, the taxman will come after them.

This was demonstrated in the case of Howarth’s Executors v IRC [1997] STC (SCD) 162. There, an executor paid out all of the estate to the beneficiaries without having paid all the Inheritance Tax, on the promise that they would pay the tax themselves. The beneficiaries paid the first two instalments of Inheritance Tax and then ran into personal financial difficulties. They were unexpectantly made bankrupt and had no way to pay the tax due. The unfortunate personal representative, Mr Silvester, despite extreme ill-health, had to make good the very substantial Inheritance Tax owing out of his own pocket.

The recent case of Harris v HMRC [2018] UKFTT 0204 (TC) is a similar case, in which a Mr Harris paid out the proceeds of the sale of the deceased’s home to the deceased’s beneficiary, on the understanding that he would pay the estate’s bills and taxes. Mr Whitefield subsequently returned to his home in Barbados and was never seen of again, leaving Mr Harris to pick up the Inheritance Tax bill.

The moral of these stories is that great care should be taken before making large distributions to beneficiaries. If in doubt, reserve an amount until you have tax clearance. A careful account then needs to be taken to ensure no other liabilities are left unpaid. In both the above cases, the executors knew the beneficiaries well and trusted them. It is hard to say no to such beneficiaries, who may be in desperate need of money. That is why many people look to appoint lawyers to act on estate administration. It is a large responsibility that should not be taken lightly or without legal assistance.