Probate is the legal process whereby a will is “proved” in a court and accepted as a valid public document that is the true last testament of the deceased. In England and Wales, the probate system deals with around £81bn of assets each year through transferring ownership of, and in many cases liquidating, assets.
In February, the Ministry of Justice announced a consultation into changes to the fee structure for grants of probate, as part of a wider review of Her Majesty’s Courts and Tribunal Service. This is under the auspices of creating a modern system suited to today’s working practices, but is also an acknowledgement the present systems are slow and expensive.
According to the consultation document, the Probate Service continues to rely on manual paper-based systems and ageing IT to deliver its services to the public. The proposals in the consultation are intended to redesign the system so it is focused on making the experience of the bereaved as simple and hassle-free as possible.
However, they are also designed to bring in an additional £250m a year by increasing some probate fees by upwards of 9,000 per cent.
At present, applications for grants of probate are set at £155 when sought by a solicitor and £215 when the application is made by an individual. This higher fee for “personal” applicants reflects some of the additional admin work that must be done by the Probate Service when dealing with applications made by individuals. Estates that require probate but are worth less than £5,000 do not have to pay a fee.
The proposed change moves the cost from a flat-fee structure to one based on the value of an individual’s wealth when they die. The threshold for when a grant of probate is required will rise from £5,000 to £50,000. This would result in an estimated extra 30,000 estates not being subject to a fee each year. For estates worth more than £50,000, the amount of the proposed fee starts at £300 and progressively increases to £20,000, depending on the value of estate (see table).
There are a number of issues with the way inheritance and probate works at the moment. For instance, there is the catch-22 situation where you cannot secure probate until IHT and other taxes have been paid, which are charged interest if they are not paid within six months from the date of death. But beneficiaries may be relying on the proceeds of an inheritance to pay IHT due, which they cannot access until they receive probate. All taxes must be paid within six months.
So access to cash can be extremely limited before probate is issued and therefore executors may face a short-term cashflow problem with regards to paying the fee. Although around 25 per cent of all estates are held in cash, some executors may still need to make arrangements to fund the fee. Some banks and building societies will allow people access to funds in accounts of the deceased for the purpose of paying funeral costs, IHT and probate fees.
However, if there is not enough money in the bank accounts of the deceased to cover the fees, the executor may have to apply for a bridging loan.
These issues with probate will all add unnecessary stress for beneficiaries and executors at a time of already significant upset. And with the consultation looking to hike fees for estates over £300,000, providing valuable counsel to your clients to consider how best to structure their estates efficiently has never been more important.
Assets that are held as joint tenants transfer automatically to the survivor on death. This ensures the asset will not form part of the deceased’s estate, which would, if held individually, form part of the estate requiring probate. It is important to understand this would remove the individual’s choice over who the asset will pass to on death.
The use of a life assurance policy subject to a trust can be used to cover the cost of IHT and also avoid the need to apply and pay for probate. A life assurance policy can be set up on an own life, single life basis or by husband and wife as lives assured on a joint-life last-death basis, with the sum assured equal to the amount of IHT liability on death.
Placing the policy into trust where the settlor is excluded from benefiting means the sum assured can be passed to beneficiaries without any liability to IHT. It also means the life office can deal with the claim on death of the life assured and pay the sum assured to the trustees expediently without the need to apply for probate and without having to borrow to pay taxes due by the estate.
The consultation on probate fees creates another compelling reason why life insurance policies written in trust should be integral to financial planning conversations with clients.
Gordon Andrews is financial planning expert at Old Mutual Wealth