The Ministry of Justice (MoJ) has confirmed it will go ahead with plans to substantially increase probate fees, which will see estates of £2m-plus paying charges of £20,000.
Probate is the formal legal process that authorises personal representatives to deal with the estate of a deceased individual, whether or not they died with a valid Will, and is usually required where the deceased leaves more than £5,000 in savings or has other assets such as property or shares.
From May this year (subject to parliamentary approval) the MoJ plans a sliding scale of charges to replace the current fixed fee of £215. Only estates below £50,000 will escape the charges, while those worth between £1.6m and £2m will be charged £12,000.
The change effectively creates a new tax that will hit property owners who are asset-rich but cash-poor, such as rural families with small farms. Out of 813 respondents to the consultation on the proposals, less than 2% were in favour.
The current £215 charge fully meets the costs of the probate service, so the totally disproportionate new fees are a way of super-taxing personal representatives of a deceased’s estate who cannot otherwise carry out their duties. A further unfairness is that the new fees are not deductible from the value of the estate when calculating tax payable.
If the estate has insufficient liquid assets, the individual beneficiaries who are asset-rich but cash-poor are also likely to be badly affected, with many having no alternative but to go to the expense of a bank loan to pay the fee. Unless assets are later sold, it then leaves a problem as to how the loan is repaid.
One way for families to avoid the new charge is to look at whether couples should own their homes in joint names or as tenants in common and whether they should write assets into a trust. However, attempts to sidestep the punitive charges could have undesirable consequences.
Older people may feel the need, or be pressurised by families, to give away assets in their lifetime to avoid the probate tax. Gifting into trust may be a way to do this effectively and without prejudicing the person’s security in their home but many will not follow such safe avenues.
For example, the person who decides to gift their home to their children may not fully appreciate the risks of doing so. Will the children as the new owners allow the parent to stay there uninterrupted? Will they fully co-operate if the parent wants to downsize later on? Whilst parents may fully trust their own children, can they have that same confidence in third parties who may become entitled to that child’s share of the home if the child runs into marital or financial difficulties or dies whilst the parents are still in occupation?
Rural families with small farms could be badly affected as the relatively high value of farmland often goes with limited income. Even if a working farm benefits from 100% agricultural property relief, so that no inheritance tax is payable, funds to pay this back door tax will still have to be found.
Garrath Reayer, Partner
The changes are a continuation of the Government’s strategy to share in the huge wealth tied up in property. The most striking example of this has been the increases in Stamp Duty Land Tax for higher value properties, and the blanket additional 3% of the price of any second home purchases, no matter what value. With a rate of 12% over £1.5m (and therefore potentially 15% for a second home) this compares with a highest rate of 4% only a couple of years ago. The effect of this has been to stop many people in London from considering a move of house – because would-be downsizers prefer to pay the additional annual outgoings of their larger London property to handing over a lump sum to the Government for their move to a smaller one.
The new probate fees should be a reliable source of income for the Government. After all, we don’t really have the option of putting off our deaths to avoid this new tax.
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