Workshop: Private client
With an increase in the number of estates becoming 'subject to litigation, the need to keep accurate accounting 'records is greater than ever. Darran Fawcett advises on 'the best way to prepare and present the information
Estate accounts are prepared to record the financial transactions that take place during the probate process. There is a statutory duty to account for the estate assets and liabilities, income and expenditure under section 25 of the Administration of Estates Act 1925 as amended by section 9 of the Administration of Estates Act 1971. However, there are no set rules for the style or content of the accounts.
The estate accounts are a method of demonstrating that the estate has been administered in accordance with the provisions of the will or the rules governing intestate estates.
A good set of accounts can be used to show the full value of the estate, its assets and liabilities, income and outgoings and explain how the estate has been administered. The accounts can be used to ensure the executors do not over or underpay legacies and will assist in confirming that the correct amount of taxes have been paid or provided for.
The need to maintain accurate accounting records and accounts for the estate is becoming more important because of the increase in estates that become subject to litigation. Accounts can be presented to the court to show the estate has been properly administered.
Here is an overview of how the accounts can be formatted to ensure the information is presented in an understandable way for the executors and beneficiaries:
Summary '“ this will provide details of the terms of the will or who is entitled under the intestacy rules.
Balance sheet '“ the balance sheet provides a 'snapshot' of the current position and an insight into the amount still available and what it consists of. The balance sheet will commonly be the first page of the accounts.
Estate at date of death '“ this details the assets and liabilities of the estate as reported on the IHT400 or IHT205. Amendments are made to reflect any changes in the composition of the assets and liabilities to arrive at the value of the net estate.
Capital account '“ the value of the net estate is the opening balance on the statement of the capital account.
Adjustments are then made in respect of accrued income and dividends which are classed as capital for IHT purposes but are income for income tax and distribution purposes. An adjustment is required to avoid double counting.
Other entries that should be reflected in the capital account are gains/losses on the sale of assets, capital gains tax (if appropriate) or a loss relief claim when shares or property are sold at a loss.
Deductions are then made from the capital account for administration period expenses, inheritance tax (if appropriate) and specific and pecuniary legacies. The balance remaining is then carried forward to the distribution account.
Where there is a continuing trust, the relevant funds should be carried forward to a separate trustees' account.
Income account '“ all income due and received after the date of death should be recorded in the income account and should be shown as received in the tax year to which it relates. It is advisable to identify each tax year separately and these will then form the combined total, the balance is then carried forward to the distribution account. Provision should be made for any tax that is due on income received gross, at the appropriate rate.
The income account will contain the information required to report to HM Revenue & Customs and assist with the completion of annual tax returns. ?It will also form the basis for the calculations required to produce tax deduction certificates for the residuary beneficiaries.
Distribution account '“ the balances from both the capital and income accounts should be brought forward to the distribution account. If residue is distributable to beneficiaries who are absolutely entitled, the total of the capital and income accounts is then divided between the beneficiaries according to their entitlements. If funds are to be held in trust, capital and income funds should continue to be kept separate.
Top tips:
1. Always ensure you have all of the information you will need (i.e. bank statements, brokers' accounts, contract notes, etc) before you embark on the preparation of estate accounts.
2. A steady, methodical approach applied to the preparation will help you to balance the accounts so that you don't waste time looking for differences.
3. If the accounts are updated regularly, they can become a useful tool for probate practitioners to assist them ?with the day-to-day administration of the estate.
4. Up-to-date estate accounts can assist with various aspects of tax planning:
? Capital gains tax: planning how and when to encash chargeable assets and making use of annual exemptions (deferring sales until a new tax year if beneficial).
? Inheritance tax: keep a record of adjustments to asset values, additional assets/liabilities discovered that are to be reported using the estate accounts.
? Income tax: use the estate accounts ?to determine when to make payments ?to beneficiaries in the most tax-?efficient way.