Thursday 15 November 2018 9:59 am  |  Updated:  Monday 03 June 2019 2:41 am

The probate debate: How will you be affected by the changes to the unpopular death tax?

By: Katherine Denham

While most of us will be familiar with – or at least have heard of – inheritance tax (IHT), probate fees are a little-known extra cost that many families are forced to confront when their loved ones pass away.

Both IHT and probate fees are often referred to as the “death tax” – although the latter is more of a fee than a tax. You pay it when applying for a document known as a “grant of probate”, which gives you legal control of someone’s estate (including money, property, and possessions) when they die.

At the moment, the probate fee is a flat rate of £215 (or £155 through a solicitor). But last week, the government served a blow to thousands of families by announcing plans to introduce a banded fee structure instead.

While estates that are valued at less than £50,000 will be exempt (currently this threshold is £5,000), everyone else will see the cost increase. Depending on your band (see table), you could be charged on a sliding scale between £250 and £6,000 – and for the band with the highest value estates (above £2m), this change represents a staggering 3,770 per cent increase in the cost.

Objection, your honour

The fees have been proposed to help fund the government’s £1bn digital reform of the court system, which – among other things – will allow people to apply for a grant of probate online.

When a banded fee structure was initially proposed last year, it was met with widespread criticism. And while the government has now cut the proposed fees to 0.5 per cent of the value of the estate (rather than the one per cent initially proposed), the banded structure is an extremely unpopular move, particularly given calls to scrap the death tax entirely.

Elizabeth Young, head of private client services at Roythornes, says last week’s announcement came as a surprise to the legal community, who thought that the matter was concluded. “This is such an enormous change of direction that it’s going to be extremely difficult for the public to swallow,” she says. “Many families will know nothing about these charges until someone close to them dies.”

Stealth tax

On one side of the debate, critics of the new structure argue that a sliding scale is not representative of the cost of the service, because the level of administration for the grant of probate is always the same, regardless of the estate’s value.

Ian Dyall, head of estate planning at Tilney, describes probate fees as a “stealth tax”, and says that the additional cost is purely a revenue raising project. “I appreciate that the courts are under pressure financially, but if they need more money, the government should provide them with a higher budget, rather than creating these hidden sources of revenue.”

However, others argue that the new structure will ease the disproportionate cost burden on lower value estates, while lifting 25,000 families out of fees altogether each year.

Justice minister Lucy Frazer says that the new banded fee model represents a “fair and more progressive way” to pay for probate services, adding: “We are also confident these fees will never be unaffordable.”

Defeating the object

However, concerns don’t just revolve around the cost to bereaved families. Young says that those who are well-advised will look at the early transfer of assets to the next generation in order to avoid this payment.

“This self-defeating process will lead to a loss for the government. We will certainly be alerting our clients to the added benefit of forward planning to avoid this fee, so it’s really questionable how much the government and court system will benefit.’’

There are also worries that this will present problems for those who have property, but no cash; say, for example, a widow living in a house which remained in the name of a late husband. Nick Rucker head of tax, trusts and estates at Irwin Mitchell, explains that 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 the property transferred into her name.

Rucker also agrees that the banded structure is a counterproductive measure, because the government could potentially lose a lot of inheritance tax – he reckons that more people will set up trusts in their lifetimes, so that probate is not needed when they die.

“There are already such schemes out there, often sold with dubious claims, and it is likely they will be sold even more aggressively now. There is a risk that these trusts do not pay the proper tax that is due on death, because an inheritance tax account is one of the essential elements of obtaining probate.”

Over the edge

For those with larger estates, it’s worth considering how their executors will fund these increased fees, says Gill Philpott, tax and trust specialist at Ascot Lloyd.

People can be caught in a bit of a catch 22 situation – where they need probate to release funds to pay the fee, but they can’t release the funds without probate.

Philpott warns that executors may be left in a position where they have to fund the fee themselves and reclaim later. “It is not yet known if banks will permit probate fees to be treated in a manner similar to the payment of funeral fees, so that on the presentation of an invoice a cheque is released to cover that cost.”

Using trusts is the best way of reducing the value of an estate. The money in a trust is outside the deceased’s estate, so not subject to inheritance tax – and the funds can be accessed without the need for probate. By using a trust, it also reduces the value of the estate, which means it would fall into a lower probate fee bracket.

While there are various different types of trusts (some are quite complex and require financial advice), a possible solution is a life insurance policy written into a trust.

“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,” explains Rachael Griffin, tax and financial planning expert at Quilter.

Griffin suggests that life insurance policies are an important financial planning tool, given that complex families are the new norm, leading to challenges when it comes to handing down wealth. “For instance, if a parent dies without a will and the surviving spouse remarries, the new spouse could stand to inherit the family wealth instead of it being passed to the children.”

Another way to minimise probate fees is by gifting some of your estate to relatives before you die. Gifts are subject to IHT if you die within seven years of sending them, but they transfer immediately, meaning you can avoid probate fees on the assets. However, bear in mind that, while some gifting is sensible, you need enough money to last you while you’re alive.

The government plans to implement the changes in April next year, but it’s wise to start planning now to prevent the death tax from eroding the money you could leave to your loved ones.