Income Poor, Asset Rich? You Could Leave Your Family with £20k in Probate Fees

Income Poor, Asset Rich

If a relative passes away and leaves assets valued over £2 million, beneficiaries can expect to be hit with £20,000 in probate fees thanks to the government’s latest cost cutting initiatives.
Probate administration looks at the execution of an estate once a person passes away. A consultation by the Ministry of Justice in February 2016 has proposed a reform of the probate flat-rate fee, currently the application fee is £215 for individuals (£155 for solicitors and accountants) with estates over £5,000. This will be replaced with a new sliding scale that is more reflective of the value of the estate. Shailesh Varahe, the Justice Minister stated that the money will be “critical to cutting the deficit and reducing the burden on the taxpayer of running the courts and tribunals”. The reform proposes seven thresholds:

  • N/A if value of estate is less than £50,000
  • £300 for estates £50,000- £300,000
  • £1,000 for estates exceeding £300,000 – £500,000
  • £4,000 for estates exceeding £500,000 – £1million
  • £8,000 for estates exceeding £1million – £1.6million
  • £12,000 for estates exceeding £1.6million – £2million
  • £20,000 for estates worth more than £2million

What about Inheritance Tax? What if my estate is worth more than £500,000?
Inheritance Tax (IHT) is calculated at 40% where the individual’s estate exceeds the threshold of £325,000. Individuals with estates worth less than £325,000 will not be liable for tax. Yet, at the Summer Budget 2015, Osbourne announced that by 2020/2021, a “main residence exemption” band will be introduced, where an additional £175,000 will be added on to the threshold if the estate is of main residence and is passed on to direct descendants, e.g. children (including fostered, adopted and stepchildren) and grandchildren, increasing the tax free allowance to £500,000 per person (£1 million for couples).
This threshold will be achieved over the next four years by the following increase in rates:

  • £100,000 in 2017 to 2018
  • £125,000 in 2018 to 2019
  • £150,000 in 2019 to 2020
  • £175,000 in 2020 to 2021

Already, spouses are allowed to transfer their estate tax-free to their partner when they die if they are married or in a civil partnership. As a result, by 2020, the sliding scale will be favourable for more parties irrespective of how much their estate is worth, once IHT has been calculated.
This can be best illustrated with an example:

Matt has an estate worth £600,000 and has decided to transfer his entire estate, including his main residence, to his two adopted children. Under the 2015/2016 IHT legislation, Matt would pay a £215 fixed probate fee and £110,000 in IHT. However, under the 2020/2021 legislation, with the threshold increasing to £500,000, IHT will drop to £40,000 and probate fees will increase to £1,000. This leaves Matt with fees only at £41,000; saving matt just under £70,000.
It is important to note that for properties over £2million, £1 will be deducted for every £2 above the value of £2 million.  This will take effect from 2017.
Paul is our probate accredited and estate planning advisor. If you would like to discuss how you can minimise IHT, please contact him at paul@raffingers.co.uk.
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