The Daily Telegraph - Saturday - Money
£6,000 probate fee is ‘stealth death tax’
The Government is pushing ahead with controversial plans to dramatically raise the fees paid by families when they wind up the estate of a loved one. The proposals will see estates worth £2m or more pay £6,000 in probate fees. The 3,770pc increase is a reduction on the original plans, which would have involved a bill of £20,000 for the largest estates.
Estates with a value of between £1m and £1.6m will have to pay £4,000. In London and the South East, where high house prices have led to increased property wealth, many families will be caught out.
Currently, a £215 flat fee applies if probate is applied for by friends or family, or £155 if a solicitor completes the process.
The money is due before any funds can be released from the estate and so bereaved relatives may need to take loans to cover the extra cost.
The Government said the changes were necessary to fund the courts system and were a “fair and more progressive” way to pay. It estimated that the move would raise £185m a year by 2022-23.
As Telegraph Money has previously warned, the charge is paid in addition to inheritance tax, which is levied at 40pc on assets above each individual’s £325,000 threshold.
It had been hoped that the Government would drop the plan in the face of fierce opposition, but the rules are now expected to be pushed through by April 2019.
A spokesman for the Ministry of Justice said the payment was “not a tax” because the money raised was ring-fenced for the courts and tribunal service. The ministry said it had “listened carefully” to concerns and revised its fee bands as a result.
However, critics have attacked the decision and described the new rules as a “stealth tax on death”.
Ian Dyall of financial planner Tilney said: “This is essentially a form of stealth tax. There is no reason that a large estate is any more costly to administer than a smaller estate so the additional cost is pure revenue raising.”
Helen Stewart of law firm Thomson Snell & Passmore said the new fees did not represent the true cost of the actual work involved in dealing with a probate application.
“All grant applications involve the same amount of work. Regrettably, this announcement will be seen by many as another form of wealth tax,” she added.
Andrew Wilkinson of Shakespeare Martineau, another firm, said the new system made “little sense” and that executors could struggle to find the necessary funds.
He added that estates were a “soft target” for taxation and that “it seems inevitable that these fees will increase further over time”.
How to beat the ‘death tax’
Probate fees are based on the value of your estate on death. This means that only by reducing the value of the estate can you cut the fees. Inheritance tax allowances – £325,000 per person plus £125,000 per person on a main residence – are not relevant. The fee is a separate administration charge and does not decrease the overall value of your estate for inheritance tax purposes.
Rachael Griffin, a tax expert at Old
HOW MUCH WILL YOUR FAMILY PAY FOR PROBATE?
Value of estate (before inheritance tax)
Up to £50,000 or exempt from requiring a grant of probate £50,000–£300,000 £300,000–£500,000 £500,000–£1m £1m–£1.6m £1.6m–£2m Above £2m Mutual Wealth, the investment company, said people should consider giving away some of their estate during their lifetime, using either a “discretionary” or a “bare” trust.
For example, a £3m estate would have to pay £6,000 in probate fees but, if £2.1m were given to a bare trust with the children as beneficiaries, the estate would fall in value to £900,000 – cutting the probate fee to £2,500. As well as saving £3,500 on probate fees, there would also be a £840,000 inheritance tax saving, as long as the individual lived for seven years after making the gift.
Mrs Griffin recommended paying into a life assurance policy that paid out on death to cover probate fees and inheritance tax.
She said: “Provided that the policy is written ‘in trust’, it can be accessed immediately on death without the need for probate.
But the new charge can be beaten with careful planning, say Sam Brodbeck and Harry Brennan ‘Estates are a soft target. Inevitably these fees will rise further over time’
“This is particularly important if your family home is your main asset and your beneficiaries need access to funds to pay the probate fee.”
But be warned: as Telegraph Money has previously reported, trusts whose assets do not pass directly to beneficiaries (usually children, grandchildren or stepchildren) do not qualify for the new residential nil-rate inheritance tax band or “family home allowance”.
Trusts whose assets are passed directly, such as “interest in possession” or “bereaved minors’ trusts”, do qualify. There are other drawbacks of using certain trusts. Gifts into discretionary trusts attract an upfront inheritance tax charge of 20pc on amounts of more than £325,000.
However, the future of trust taxation is now being called into question and existing loopholes and breaks could be scrapped. This week the Government announced a consultation into the way trusts are taxed to make “taxation simpler, fairer and more transparent”.
It is now asking for views and evidence on reform. The consultation will close at the end of January.