Bereaved families could see the cost of probate soar by thousands of pounds after the Ministry of Justice confirmed that it will implement a banded structure for the payment of probate fees from April next year.
The controversial new structure was proposed in March last year, but was quickly shelved in April as there was not enough time to get the legislation finalised in time for the General Election in June.
Currently a flat fee of £215 applies in England and Wales (£155 if you use a solicitor). The new charges will be linked to the size of the estate and will be as follows:
· Up to £50,000: no charge
· £50,000- £300,000: £250
· £300,000- £500,000: £750
· £500,000 to £1m: £2,500
· £1m to £1.6m: £4,000
· £1.6m- £2m: £5,000
· Above £2m: £6,000
Although the MOJ has stated that estates will never pay more than 0.5% of their estate the new charges will see costs soar for those with larger estates. A £500,000 estate would pay more than 10 times the current fee at £2,500 while those in the top tier pay 3,771% more, according to figures from Quilter.
However, overall the MOJ reckons 80% of estates will not pay more than £750. More estates will also not have to pay probate fees under the new rules as the probate fee threshold will rise from £5,000 to £50,000. The MOJ estimates this will exempt some 25,000 estates every year.
All income raised will be invested in the courts and tribunal service and will help fund improvements to the Probate Service including the ability to apply for a grant of probate online.
However, while tax planners welcome moves to increase the threshold at which fees start to be levied, they say it’s difficult not to describe the new charge as a ‘stealth tax’.
Rachael Griffin, tax and financial planning expert, at Quilter comments: “Their announcement includes reassurance that the money raised will be spent on running the courts and tribunal service. However, that still means that people, particularly those at the top end, will be paying disproportionately for the administrative work involving probate. So despite the reassurances it’s hard not to see this as a stealth tax on those who already pay inheritance tax. Easing the burden on lower estates is admirable, but it still means for others they will face a steep fee during an emotional and challenging time.”
She adds that the new system will also make estate planning more complicated and, in some cases could prove counterproductive for the government. “Using trusts can help reduce the value of an estate for inheritance tax purposes, meaning a lower charge will apply. People concerned about how beneficiaries will pay the probate fees could leave sufficient funds in a life insurance policy, and provided the policy is written in trust, it can be accessed immediately on death, without the need for probate.”
Nick Rucker, national head of tax, trusts and estates at solicitors Irwin Mitchell also points out the new system could also create significant issues for some bereaved families.
He says: “It will present real problems for those who have land but don’t have cash. An example would be widows where the property remained in the name of a late husband. In such a case no inheritance tax would be payable but a widow would still need to pay the much higher fee in order to get probate and the property transferred into her name.”
Ben Tyer, a private client solicitor at GLP Solicitors agrees and says there are still plenty of questions that need answering. "What’s not clear is how it will work in practice because the fee will be required on application yet banks may not release funds until a grant is produced. It could place an undue burden on executors. Will executors have to stump up the cost themselves? Will they have to take out a loan? My initial thoughts are that it could mirror the funeral fees arrangement whereby banks will issue a cheque for funeral costs on production of an invoice before a grant has been obtained," he says.
James Ward, Head of Private Client at Kingsley Napley LLP, adds: "My greatest fear is that this “tax” will push people away from using Wills as the means for leaving assets on death. In order to reduce their estates before death, individuals may turn to gifting during their lifetime which could leave them financially vulnerable or use the survivorship rules of joint property and bank accounts. The survivorship rules see property automatically passed on death rather than via the Will and therefore the value is not included in the value of the estate at the grant application stage. It is very effective in some cases but can be lead to inequality between children and a misunderstanding as to who gets what and not fulfil the deceased’s wishes."