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March 2, 2016

Why the proposed probate fees will only add additional grief (and tax) to HNWs

By Spear's

The courts are underfunded and the government has decided that the bereaved and their families should bear this cost, says Jessica Schock

‘In this world nothing can be said to be certain except death and taxes’ – and, I venture to add, yet more taxes. Well, strictly speaking, it’s an ‘administration fee’, but following the publication by the government of its proposals for increasing the charges that the probate court can make when issuing grants of representation (a grant) some might think of it as an additional tax on death.

In England and Wales the grant enables the executor or administrator to deal with the assets in a deceased’s estate, for example to close bank accounts, to sell property and pay debts and liabilities (including any inheritance tax) and expenses of the administration of his estate and eventually to distribute the assets to the beneficiaries. The current court fee for the grant is £155 for a professional application (e.g., made by a solicitor) and £215 for a direct personal application.

According to the Ministry of Justice consultation document they are now proposing to return to a fee structure where the fee reflects the value of the estate and will be based on a simple band structure:

Value of estate (before IHT) Proposed Fee
Up to £50,000 or exempt £0
Exceeds £50,000 and up to £300,000 £300
Between £300,001 and £500,000 £1,000
Between £500,001 and £1,000,000 £4,000
Between £1,000,001 and £1,600,000 £8,000
Between £1,600,001 and £2,000,000 £12,000
Over £2,000,000 £20,000

It is perhaps surprising that the government are proposing to use the ‘slab system’ once again, given that they recognised the unfairness it created in the context of stamp duty land tax (SDLT) and they reformed the way in which SDLT is charged. If adopted, this would mean that a gross estate worth exactly £2 million will pay £12,000 and an estate worth £2,000,001 will pay £20,000. That’s an £8,000 difference for £1 more (or in effect £7,999 less) in your pocket.

Whilst the Ministry of Justice explains the hike in fees as ‘fair’ because it asks those users of the courts who can afford to do so to pay a greater contribution towards their operating costs, there is a faint whiff in the air that smells very much like a tax and not a fee. The probate court fee has always been just that – an administration fee and the cost for the court in processing a grant does not change whether the value of the estate is £5,000 or £5,000,000. But given that the probate fees currently cover the actual costs in the probate court, can one be forgiven for wondering whether this is really a fee increase, or actually a form of disguised inheritance tax.

There is no question that the courts in England and Wales are underfunded and the government has decided that the bereaved and their families should bear this cost. So what could you do to mitigate this?  Unfortunately the answer is ‘not very much’. In the ‘olden days’ we would have suggested a trust, but that is not such an attractive option now because of the tax implications.

A couple could ensure that they hold all of their assets in joint names so that on the first death everything will pass automatically to the survivor and there is no need for the survivor to obtain a grant. This is easier said than done though, because there are certain assets that cannot be held jointly, e.g. ISAs. Many couples prefer to keep their own assets separately for any number of reasons, perhaps only owning the family home jointly as well as one or two bank accounts to pay for everyday household expenses.

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An alternative might be for one spouse to own everything and the other spouse not very much at all and then hope that the ‘poorer’ spouse dies first. Hardly a strategic plan! Again, this will not be a very satisfactory position for most couples and suggests that the government understands that there really is very little opportunity to avoid this ‘fee’.

Jessica Schock is an associate at boutique private wealth law firm Maurice Turnor Gardner LLP, examines a new stealth tax.

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