New probate fees put asset-rich but cash-poor families at risk

Asset-rich but cash-poor families could put their welfare at risk as they attempt to minimise the impact of an unprecedented rise in probate fees, private client lawyers have warned.

Last week the government decided to go ahead with an increase in grant of probate application fees based on the value of an estate before inheritance tax, despite overwhelming opposition by lawyers.

The decision follows a consultation which received 853 responses, 695 of which said it would not be fairer to move to a proportionate ad valorem fee structure. Objections included the fact that the administration involved was the same irrespective of the value of an estate and that the cost should be set by reference to the service provided.

While there will be no charge for estates worth less than £50,000, those between £500,000 and £1m will attract a fee of £4,000, jumping to £8,000 for those above that up to £1.6m, and £12,000 for those valued between £1.6m and £2m. The fee will be £20,000 for estates over £2m.

Most likely to be affected are families in London and the South of England where property prices have boomed in the past couple of decades, but whose assets outside the family home have not grown in the same proportion.

As a result, lawyers fear, property owners are likely to explore alternative ownership and inheritance arrangements. Not all solutions will be appropriate, however, and some could present unnecessary financial risk compared with the level of fee at stake.

‘We still have traditional families where the property is in the name of the husband, and one option for them is to own the property as joint tenants, where a grant of probate will not be required and the surviving spouse can avoid the new fee, but that may not always be the best solution,’ suggested Claire Carberry, a partner at DMH Stallard.

James Ward, head of private client at Seddons, concurred. ‘It will not work in complex family situations such as second marriages, and the result will be beneficiary dissatisfaction and a rise in disputes and litigation, straining the courts even further.’

Carberry also warned against the temptation to make lifetime gifts to children – a common solution in respect of inheritance fees which could now also help reduce or avoid the new probate fees. ‘Children may die, get divorced, or end up in financial difficulties that put the assets they’ve been gifted at risk. A better option would be to place these assets, especially property, in a trust.’

Sarah Phillips, partner at Irwin Mitchell, agreed, saying there was a risk that children who had been gifted the house by their parents may not always act in their parents’ best interests later on. ‘Will the new “owners” enable the parent to move to a suitable smaller property, or indeed stay at home if they still wish to when others feel they should move,’ she asked.

‘Older people may feel pressured to give away assets in their lifetime, to avoid these high charges,’ she added. ‘There may be ways of doing this effectively, without prejudicing the security of the persons living in the property, by using a trust, but many will not follow such safe avenues.’

Peter Hopkins, a partner at Mercers Solicitors, said one option, especially for the larger estates where the probate fee might be as high as £12,000 or £20,000, would be to set up a discretionary trust containing a life assurance policy.

‘They have been popular for years but could become even more so,’ Hopkins said. ‘The individual pays possibly a modest amount each month as a premium on a life assurance policy which is written in trust. The premium payments will count as “normal expenditure out of income” and therefore are not subject to IHT.

‘When the taxpayer dies, their executor cashes in the policy with the death certificate and the policy proceeds are outside the estate for IHT and the cash can be used immediately to support the surviving spouse, pay IHT, the funeral bill, legal fees and probate fees.’

Hopkins also said the effect of the fee hike should be put into perspective. According to government figures, more than half of estates – those below £50,000 rather than £5,000 currently – will now be exempt from probate tax. For the next tranche up, the new £300 fee requires a modest £85 top-up. Together, this accounts for 81 per cent of all estates in England and Wales. As for the next band up (£1,000), which affects 11 per cent of estates, the £785 difference from current levels ‘isn’t too controversial’, Hopkins said.

Another element shouldn’t be underestimated, according to Hopkins: the value of the service provided by the probate registry goes beyond the mere copying of figures from the oath into the grant of probate.

‘What the probate registrars are doing is in effect fraud prevention,’ he said. ‘There is a huge increase in the amount of vigilance being called for in handling of money by law firms and by attorneys because of fraud, particularly online. And the government are calling for the probate service to go mostly online in the future.

‘Already 40 per cent of probate applications are personal applications made without a solicitor’s help, and that’s probably going to continue to rise. So the oversight provided by the registry will be particularly important.’

One further practical difficulty could be for the representatives of the estate to raise the funds required to pay the fee. In its consultation, the government suggested providers of funeral packages could develop products building in an element of early release of the necessary funds.

Sarah Crowther, also a partner at Mercers Solicitors, said the financial services sector already offered such product for inheritance tax liabilities, which could be extended to probate fees. Other options already available from banks include loans. Claire Carberry, however, said that obtaining a loan wasn’t necessarily a realistic option for clients on low income.

Jean-Yves Gilg is editor in chief at Solicitors Journal

jean-yves.gilg@solicitorsjournal.co.uk | @jeanyvesgilg