Currently most applications made by solicitors for a UK grant of representation for a deceased’s estate incur a flat fee of £155 payable to the Probate Registry. However, perhaps within a little over two months’ time, a grant could cost as much as £20,000! How did we get here and, more importantly, what can be done about it?
The probate fee increases were first trialled in a Government consultation published on 18 February 2016 (further details in my 25 February 2016 article here) and, despite the vast majority of respondents disagreeing with the return to probate fees based on estate value, the Government is pressing ahead on the grounds that fee increases in the Probate Registry will help to ensure that the UK court system as a whole covers its costs.
The Government must first pass enabling legislation, but it is expected that applications for grants made from as early as May 2017 will be faced with these new charges, which scale the probate fee payable to the size of the estate, as follows:
|Value of estate (before Inheritance Tax)||Proportion of all estates in England and Wales||Proposed fee|
|Up to £50,000 or exempt from requiring a grant of probate||58%||£0|
|Exceeds £50,000 but does not exceed £300,000||23%||£300|
|Exceeds £300,000 but does not exceed £500,000||11%||£1,000|
|Exceeds £500,000 but does not exceed £1m||6%||£4,000|
|Exceeds £1m but does not exceed £1.6m||1%||£8,000|
|Exceeds £1.6m but does not exceed £2m||0.3%||£12,000|
The fee is based on the net real and personal estate passing under the grant. Fortunately, therefore, life tenants of IPDIs (a form of Will-based trust) or pre 22 March 2006 interest in possession trusts do not have to worry that the aggregation of their personal assets with the value of the trust will increase their probate fee under the new scale.
Note that the date of death is immaterial; it is the date of the application for a grant that will govern whether the new fees apply. The Probate Registry is gearing up for a marked influx of applications ahead of this change.
Many estate administrations involve applying for a grant, particularly where assets are held in the deceased’s sole name. Financial institutions usually want to see a grant unless the value of the deceased’s holding is relatively modest. Anyone with an ISA of any value will need a grant for their estate as ISAs cannot be held in joint names. Also the UK Land Registry will insist on sight of a grant if land is to be transferred from a deceased sole owner into the names of the personal representatives, or if personal representatives want to sell the deceased owner’s land or transfer it into the name of an heir.
These fee changes may encourage married couples to consider owning assets jointly so that, when the first death occurs, assets pass automatically to the surviving spouse by survivorship – no grant needed and therefore no probate fee incurred. However, this may raise issues of control for some couples, or conflict with their tax planning, as they may want their share of jointly owned assets to pass into a will trust or ultimately to someone other than the surviving spouse after the first death. Sometimes it may be acceptable for legal title to pass by survivorship to the surviving spouse and the beneficial interest to be held as tenants in common (i.e. as ‘divided shares’) but this may not provide sufficient protection for some couples and could still result in a grant being needed to deal with the beneficial interest. (For a good introduction to the differences between joint tenants and tenants in common ownership of UK property for co-owners, have a look at my colleague Joe Hobson’s article here.)
The threat of significant probate fees may also force some individuals or widow(er)s to consider making lifetime gifts of assets to their heirs (or face pressure from their heirs to do so). If probate fees are based on the net value of the estate passing under the grant, deathbed gifts, even if they give rise to gifts with reservation of benefit for Inheritance Tax purposes, may become much more common. Use of ‘probate bypass’ trusts is unlikely to prove popular as transferring assets into most types of trust could give rise to an immediate 20% Inheritance Tax entry charge. Transferring assets into the joint names of the individual and their heir(s), so that the asset passes by survivorship, could be considered but this is fraught with difficulty. Consider the example of a mother who decides to transfer her share portfolio into the joint names of herself and her son, who is to inherit the portfolio after her death. Unless the equity ownership is documented very carefully, the mother could be regarded as making a disposal for Capital Gains Tax purposes and a gift for Inheritance Tax purposes. Uncertainty may arise as to whether the mother or the son should pay tax on the portfolio’s dividends and gains. Can the son be trusted not to deal with the portfolio contrary to his mother’s wishes? Is the answer the same if the mother loses capacity? If the son divorces, will his ex-wife accept that the son does not own at least 50% of the portfolio? On the mother’s death, the arrangement is likely to come under some scrutiny, both by HMRC and also the other heirs of her estate. Joint ownership should not be jumped into lightly, simply for the sake of saving probate fees.
Executors of estates which need to submit an IHT400 account to HMRC – being estates in excess of £1m or in excess of the £325,000 nil rate band if no Inheritance Tax exemption or transferable nil rate band is being claimed – must get their skates on and submit an IHT400 without delay, if they do not want to be caught by the fee increases. Usually these estates submit the IHT400 and wait for HMRC to return a stamped IHT421 to confirm all IHT falling due at that point has been paid before applying for the grant, as the stamped IHT421 must be submitted with the other grant application papers to the Probate Registry. HMRC can take upwards of a month to issue these at present. Executors may be in the difficult position of facing not only penalties if they submit an incorrect IHT return, but also unhappy beneficiaries if they miss the (as yet unknown) fee increase deadline. In a press release earlier this week though, the Probate Registry confirmed that it is possible to submit the IHT400 to HMRC and make the grant application to the Probate Registry simultaneously, provided the probate application is marked to say that this has been done.
NB: Do not be fooled by reference to ‘probate fees’ in the Government’s consultation documents. A grant of probate is issued where a person dies having made a Will but intestate estates (for which a grant of letters of administration is usually made) will be liable for the fee increases as well. There is still no excuse for dying without a Will!