The costs of administering an estate are set to soar from next month when probate fees will increase by up to 3,000 per cent. Currently, applications cost a standard fee of £215 which reduces to £155 if using a solicitor. Where the estate is worth less than £5,000, the cost is zero. For estates that pay a fee, the current pricing structure reflects the fact that the level of work required to deal with an application does not increase for larger estates.
From April, the fees will increase for many – and for some estates, the increase will be dramatic.
Estates worth up to £50,000 will in fact benefit – with a reduction in the fee to zero. Anyone dealing with a loved one’s estate in this bracket should consider waiting for the new fee structure to save having to pay a fee.
Those estates worth £50,000 up to £300,000 will pay (increase: £35) and those valued from £300,000 up to £500,000 will pay £750 (increase: £535). For estates worth £500,000 up to £1m, the fee will be £2,500 (increase: £2,285) and for those in the £1m up to £1.6m bracket, the fee jumps to £4,000 (increase: £3,785). Larger estates of £1.6m up to £2m will pay a £5,000 fee, an increase of £4,785. However, £2m+ estates will be hit the worst with a staggering £6,000 charge, a huge increase of £5,785 over the standard application fee.
Those currently administering estates worth £50,000 or more should consider making their application before April to avoid the increases.
Whilst the Ministry of Justice has claimed 25,000 estates will pay nothing under the structure, soaring house prices could see many more estates fall into the higher bands. The increases have attracted substantial criticism: as noted, there is no relationship between the work involved in processing an application and the value of the estate. This has led many to call the new charges a ‘stealth tax’ that has been introduced through the back door.
So what can you do to mitigate the effects of this new charge?
One area to consider is inheritance tax planning which has become more important than ever with the rising value of estates. Rising property prices and the government’s decision to freeze the nil rate band (since April 2009) has meant more estates are liable for inheritance tax than before.
Each person has an inheritance tax allowance of £325,000, and an additional allowance of £125,000 if they pass the family home to direct descendants. This additional allowance will increase to £150,000 in April 2019 and £175,000 in April 2020. If the allowances are exceeded, inheritance tax is charged on the excess at the rate of 40%.
Where the first to die of a married couple or civil partnership does not use up their allowances, the unused amount can be claimed on the second death.
However, it may not always be desirable to leave ‘everything to each other and then the children’. One side effect of this is that if the survivor remarries, their new spouse can be first in line to inherit and the children may see nothing. Even if the survivor makes a new Will benefiting the children first, it would be open to their new spouse or civil partner to claim against their estate.
Another side effect is that if the survivor needs care, the value of the whole estate can be available for care fees.
There are a range of alternative solutions to consider such as leaving a life interest to each other to protect a portion of the family wealth for the children.
Taking steps during your lifetime to reduce the size of your estate is another important consideration. Some people think this means giving away their home and continuing to live in it, or transferring it to a trust. Sadly the first option does not avoid tax at all and in fact, puts the gift-giver at risk, should the recipient fall on hard times. The second option should be treated with caution and the advice of an experienced estate-planning solicitor. Unregulated companies offering to set up such trusts, often for extortionate fees, should be avoided.
A legitimate way to reduce your estate during your lifetime is to take advantage of the various inheritance tax gifting allowances. These include:
- An annual gifting allowance of £3,000 which can be rolled over by 1 year.
- £5,000 wedding gift allowance for your own child (£2,500 for your grandchild or great grandchild, £1,000 for everyone else)
- Up to £250 per person each tax year, provided that you have not used another allowance on that person.
- Gifts made to charities and political parties.
- Gifts out of your income, provided that you can maintain your standard of living after making the gift.
- Payments to assist with another person’s living costs including elderly relatives and children under the age of 18.
The allowances are individual – so a married couple or civil partner can give, for example, £6,000 a year under the annual allowance. This is increased to £12,000 if they gave nothing the previous year.
The last two lesser-known categories of gift are in fact extremely generous. The ‘gifts out of income’ allowance in particular can be used to top-up a discretionary trust and will take the amounts outside of the estate without having to wait for the 7 years to pass. Those considering such an arrangement should speak to a solicitor for advice first and ensure they keep meticulous records.
In addition to ensuring that your estate is left in a tax-friendly way, it makes sense to write a Will and ensure your loved ones know about it. Using a solicitor ensures there are no mistakes made with the drafting or execution of the Will, reducing unnecessary expense when the document is needed. Further, it reduces the likelihood that a claim will be made against the estate, preserving more of your assets for your intended beneficiaries.
For more information, make an appointment with one of our estate planning team in Southport. Call Debbie on 01704 532890 or email firstname.lastname@example.org