UK probate fees – a tax on bereavement?

The Ministry of Justice ran a consultation between February and April 2016 which proposed reforms in the fee payable for an application for grant of probate. The consultation sought views on:

• moving from a flat fee for applications for a grant of probate to a banded structure, where the fees increase in line with the value of the estate, up to a maximum of £20,000.
• raising the threshold below which no fee is payable from £5,000 to £50,000.

A response to the consultation was issued in February 2017 with a very low proportion of the respondents agreeing with them. Despite this, the government have decided to proceed with all the proposals as set out in the consultation. It is widely anticipated that the probate fees in England and Wales will change with effect next month and are expected to deliver around £300 million in additional income to HM Courts & Tribunal Service.

The fees

Currently, a £215 flat fee applies if probate is applied for by friends or family, or £155 if a solicitor completes the process. Estates that require probate but are worth less than £5,000 do not have to pay a fee. From May, fees will increase via a banded system in line with the value of the estate, with maximum fee payable of £20,000 on estates above £2 million. The change will mean that 98% of estates will pay £4,000 or less to obtain grant of probate, with estates worth less than £50,000 paying no fee at all.

Respondents to the consultation raised concerns about the ability of the executors to raise funds to pay the fees, stating that many estates may be ‘cash poor, but asset rich’. Analysis referred to in the government response document suggests that, on average, 25% of an estate is cash and could be released, subject to bank and building society risk assessment procedures. Other standard ways suggested for executors to raise funds to pay the fees included personal assets of the executor, a loan or assistance from beneficiaries of the estate. There is, however, a much simpler solution.

The solution – gifts and trust planning

Outright gifts and lump sum trust planning can bring an estate into a lower band for probate fees purposes resulting in a reduced fee. Lump sum trust planning can, of course, also deliver Inheritance Tax (IHT) savings. Perhaps more importantly, trusts allow speedy access to the funds for the beneficiaries when the settlor dies. This can allow the probate fees to be paid without the need to obtain a loan or eat into the executor’s own assets. Note that this only works if there is a trustee to administer the trust.

Fundamentally, trustees are the legal owners of the trust assets and if the sole, or last, trustee of a trust dies, it falls to their executors to ensure that the trust is administered. The catch here is that many providers will require the grant of probate to prove who will administer the trust.  It is, therefore, essential for regular reviews of the trustees to be carried out.

Those with modest estates may wish to use a discretionary probate trust, which would allow the settlor access to the trust fund. Whilst there are no IHT advantages, there is the added benefit of faster payment of the trust fund to the trustee on death of the settlor and possibly even bringing the estate into a lower band for probate fees. Those with larger estates may wish to use gift trust planning to give away their assets.

To explain further, below are a couple of scenarios which are subject to the finer details of the legislation being released:

Example 1

An unmarried individual has an estate of £2.2m and is facing a potential £20,000 probate fee and a potential IHT liability of £750,000 (£2,200,000 less £325,000 at 40%).

• Assume the individual invests £300,000 into an insurance bond but is willing to give this away for estate planning purposes and does not need personally to access this investment.
• The individual could make an outright gift – the estate falls below £2m so probate fees are immediately reduced from £20,000 to £12,000 and if the individual survives seven years the IHT liability falls by £120,000 (£300,000 x 40%). The individual, though, has completely lost control once that money has been given away.
• Alternatively the individual could set up a discretionary gift trust. The probate and IHT savings are the same but the trustees which can include the client will decide who gets what and when (i.e. control is retained).

Example 2

An unmarried individual has an estate of £310,000. There is potentially a £1,000 probate fee but no potential IHT liability (as estate within the £325,000 nil rate band)

• The individual invests £50,000 in an insurance bond but needs to be able to personally access those funds
• The individual could place bond in a Probate Trust. The estate falls below £300,000 so the probate fee is reduced to £300. The individual can be one of the trustees but is a potential beneficiary so can access funds when required.

In conclusion, the new proposed UK probate fees have highlighted the need for professional financial advice for anyone with UK assets. Don’t delay the inevitable, seek advice on the use of trusts or gifting assets to your loved ones whilst you can.