At the time of writing it seems that Brexit is not the only matter in disarray with a deadline looming.
Further comment on the proposed probate fee increases was buried in a 200 page report by the Office for Budget Responsibility (OBR) in conjunction with the Spring Statement on 13 March. The OBR’s outlook report states that: “given the structure of the fees, the Treasury expects the ONS [Office for National Statistics] to classify them as a tax on capital rather than a payment for a service”. This contradicts the Ministry of Justice’s assertion that this is a fee rather than a tax and yet, in their comment, the Ministry of Justice is still steadfastly sticking to its prior position and saying this is classified as a tax for accounting purposes only.
By way of background, a Delegated Legislation Committee voted on 7 February 2019 on the draft Order (originally proposed in November 2018) regarding the fee increase and this passed by a narrow margin of 9 votes to 8. Nothing more has been announced since.
The key point is that a tax, rather than a fee, would require full debates followed by a vote in both the House of Commons and Lords.
Despite being scheduled to come into effect next month there is still, staggeringly, a lack of clarity on the implementation of the proposed probate fee increase from £155 (for a solicitor’s application*) to the new fees outlined below.
Value of Estate(passing via the grant of probate)
|Proposed New Fee||Percentage of estate (at threshold)||Fee Increase*||Fee Increase (%)*|
|Less than £50,000 (previously £5,000)||Free||None (benefit)||None (benefit)||None (benefit)|
|£50,001 - £300,000||£250||0.5%||£95||
|£300,001 - £500,000||£750||0.25%||£595||384|
|£500,001 - £1,000,000||£2,500||0.5%||£2,345||1,512|
|£1,000,001 - £1,600,000||£4,000||0.4%||£3,845||2,480|
£1,600,001 - £2,000,000
|More than £2,000,000||£6,000||0.3%||£5,845||3,771|
Source (fee figures): Ministry of Justice
By way of information for anyone who does not regularly deal with estate administrations, the grant of representation (commonly known as probate, although strictly this is only when there is a Will) is a legal document which confirms that a personal representative has the authority to deal with a deceased person's assets. If the deceased person has any assets of significant value in their sole name then a grant is usually required.
Understandably government attention is focussed elsewhere right now but it does seem that this is being sneaked through while other matters grab the headlines, and it does not excuse the issues this is causing in practice and the seeming lack of regard to continued concerns and criticism from professionals, certain MPs, members of the House of Lords and charities. Despite some suggestions they might do so, it remains to be seen whether any MP will make a formal stand against this.
Short term impacts
This has already led to hugely increased pressure on personal representatives, professionals, HMRC and the Probate Registry as applications are, where possible, rushed in before April. All this could have been avoided by a timely and clear announcement - for example, that the new fee structure would apply for deaths after a certain date (surely the sensible option because everyone would know exactly where they stand) rather than when the probate application is made or probate is granted. Similar issues occurred with the scrapped probate fee increases in 2017. Lessons do not seem to have been learnt.
Longer term impacts and planning
It simply is not the case that only the very wealthy will be impacted and estates which are just one pound over a threshold will see a sharp jump in the probate fee payable. There is certainly a sense that this is a raid on the middle classes because the increases, as a percentage of the total estate, are highest in the middle fee bands. For example, the difference between an estate of £500,000 passing under the grant compared to one of £500,001 is £750 versus £2,500 (equating to 0.5% of the estate). This is well within inheritance tax allowances for a couple so that inheritance tax would not be payable, but the probate fee would be substantial.
The standard inheritance tax ‘nil rate band’ has remained frozen since 2009 at £325,000 and, despite the newly introduced ‘residence nil rate band’ in 2017, there is a sense of increased tax take by stealthy means generally.
Some of the key longer term concerns and planning points regarding probate fees are:
- Individuals may decide to make lifetime gifts which they might not otherwise have made. This is because, for inheritance tax purposes, a lifetime gift is brought back into account if the individual making the gift does not survive for 7 years afterwards or continued to benefit from the asset gifted. However, for the purposes of applying for a grant of probate, a lifetime gift will remove value from an estate immediately for the purpose of the probate fee. Advice will be necessary to avoid unexpected results.
- Assets are more likely to be put into the joint names of spouses (or other intended beneficiaries) so that these pass to the surviving owners on death outside of someone’s Will and without the need for a grant on that asset. This may be suitable in some circumstances but there may be genuine tax and estate planning reasons why this is not appropriate.
- If more assets are held jointly by spouses or other individuals, so that they do not pass through the Will, this could lead to a decrease in charitable legacies and residuary gifts under Wills. Unlike inheritance tax, there are no exemptions from the proposed probate fee for charitable bequests or for a spouse. Charities have raised concerns about this without any success in bringing about any change.
At present, solicitors assisting with an estate administration are generally happy to fund the probate fee and accept reimbursement in due course, and an executor may also decide to do so in making a personal application. However, this will no longer be viable for anything other than the lowest proposed fees. There is currently a recognised procedure and HMRC form to enable banks and building societies to release cash directly to HMRC to meet the necessary inheritance tax due up front in order to obtain the grant. Something similar will need to be agreed so that the Probate Registry can be paid directly from a frozen bank account held by the deceased. At the time of writing there is no clarity on this issue and it is likely to cause delay in the estate administration process.
The above assumes there is readily available cash in the estate to pay the fee. This is not always the case. More executor loans may be necessary in future to fund both the probate fee and inheritance tax due. This increases costs and timeframes to obtain the grant.
Naturally there will be planning opportunities to avoid increased probate fees in some circumstances but, as with all taxes (or ‘fees’ in this case), you should not let the tax completely drive decision making.
We await the final proposals with interest.
If you would like to discuss any of the potential planning points then Barlow Robbins’ Private Wealth & Tax team would be happy to assist.