Probate: How to manage death and taxes

Probate: How to manage death and taxes

Mick Jones takes a sideways, but informative, view on the issues accountants face in offering probate services

Mors tua, vita mea. Your death my life. Isn’t probate wonderful! The Probate Services (Approved Bodies) Order 2009 came into force on 1 August 2009 and the floodgates opened. Well, not really floodgates, more a trickle.

The accounting profession began to think about crossing the line. ACCA was the first to dip its toes into the probate waters, becoming an “approved body” through which members could offer services. The ICAEW took a little longer, but has applied to become an approved regulator and licensing authority for the reserved legal activity of probate and is almost there.

Its website hails the approval by the lord chancellor of its application and anticipates it will receive approval in the next few months and will be in a position to authorise or license firms by June 2014. There is a small matter that a firm wishing to carry out probate work must have a principal who is an ‘authorised individual’; in other words, a course to attend…

For accountants this is an opportunity, but not without risk. Accountants like a good dose of certainty, and there is nothing more certain than death and taxes. Now taxes they can do, but part of that business is always under threat, so should they now turn to death?

The probate market

Solicitors make a habit of making money from death. They don’t use the term ‘will bank’ lightly. It is perceived as an asset. If they have written a will, once the death is announced they slip on the black tie, and are at the grieving relatives’ sides quicker than you could do a tax return. Now accountants can almost do the same. New structures will of course require links to some will-writing capacity.

The Law Society of England & Wales’ Probate Practitioner’s Handbook says that, on average, there are 560,000 deaths a year in England and Wales, of which 180,000 require a grant of probate. A volume business at last? Not so fast. Accountants face competition, not only from solicitors, but also from banks and other corporates.

So if accountants are to enter this new world, where restrictive practices are swept aside and the high street is full of legal disciplinary practices, multidisciplinary practices and alternative business structures they need a clear sense of the risks involved, the investment required and the opportunity for profit. Enter the world of ‘reserved legal services’ with care – and a black tie.

There is double entry after death

Accountants are used to preparing estate accounts. It’s analogous to insolvency, really. Collect and sell the assets, identify and pay the creditors and distribute what’s left to the beneficiaries. Of course, a complete probate is not that simple. It’s better to think of operating in two time periods, both with attendant risks.
The first time period is the date of death: an important day for many reasons, not least because interest on tax due starts to run six months after this date. The pressure is on.

There needs to be an efficient process to identify all assets and liabilities at that date. Accountants will write lots of letters to verify assets and to satisfy themselves that all liabilities have been identified. Then they have to fill in the IHT400.

‘The better your processes are, the more competitive you can be’

Forms hold no terror for accountants, but this form is big – huge, in fact. It is not an intuitive form, and it pays to get it right – or rather there are penalties for getting it wrong. It needs to be accepted by HMRC to get the grant of probate and move into the second time zone. The administration period traditionally starts the day after the death and continues until the estate is completed. The first accounting period will normally be to the end of the tax year after the date of death.

Now, accountants are administering the estate on behalf of the personal representatives. Monies collected and paid out will go through their client account. Risks abound. Gifts can cause problems, legacies can cause friction within a family, and there is always the fear that an unknown creditor may mean the early distribution made to a beneficiary was a little premature. It is always harder to get money back.

The risks can be managed, but good processes are needed. At this stage, beneficiaries can almost smell the money. They will call, they will write, and accountants need a clear policy for charging for their time.

Winning work

If accountants have a thriving private client department then this is another service they can offer alongside trust administration and financial advice. Banks will outsource work where they are the executor of an estate, but be aware that it will either be the difficult cases they cannot profitably deal with, or they will involve the rapid turnaround of IHT400 forms – jobs with low margin, but high volume.

Accountants look for obvious synergies: do you work with family businesses? Do you specialise in farm accounts? Be aware that the offspring of your high-net-worth clients are themselves financially astute. You cannot be sure that you will automatically get the probate when a senior family member dies. You may be asked to get the grant of probate and then have to compete for the administration of the estate. The better your processes are, the more competitive you can be.

Good move?

There is no doubt this can be a very profitable area, especially with large, complex estates that take years to resolve. Key questions need to be answered: are the required skill-sets already in-house, or will they have to be bought in? Are there existing synergies in the current mix of clients? Are there strong links with a potential provider of business, such as a bank, to get a critical client mass quickly? Are processes and systems fit for purpose?

Fundamentally, accountants need to assess risk, determine the investment they will need to make, and ensure that they have adequate processes to cope with the workflow. Remember: risk, investment and processes. In short, RIP.

Mick Jones is managing director of thewealthworks

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