Is your estate worth more than £500,000? If so, your probate court fees may be going up from £155 to £4,000; if your estate is worth more than £2m, make that £155 to £20,000.
No, this is not Inheritance Tax: this is justice; the department of justice that is, who are proposing a huge rise in the court fees payable when Executors of a deceased estate apply for a Grant of Probate. The rise is to help cover the cost of other parts of the court system.
The government has been ‘reviewing’ feedback on this proposal since April, so a decision would seem nigh. Will it happen? I think so; if not in full, then in a watered down version.
So is there any escaping this court fee hyperinflation?
The use of multiple bank accounts, joint ownership and trusts could all be strategies. But I suspect the government will identify and shut down all the obvious escapes before, or soon after, bringing the new rules into place. Not only does the proposal’s revenue forecast depend on it, but so does their Inheritance tax collection, which is mightily assisted by the fact that one is required to report on the tax position before one can obtain a Grant. As the Grant is the document that enables you to collect in the substantive assets in the estate, this makes HMRC the gatekeeper to those assets. Take that away and the problems are obvious.
From a legal perspective, incentivising people to avoid obtaining the document that helps to ensure the proper administration of an estate has clear problems. A Grant is a way of ensuring the right people get access to the deceased’s assets; it is also a reference point for many other areas of estate administration. It is not something you want to mess around with.
Total escape from these new fees (should they be introduced) is therefore unlikely.
Partial escape, however, is more feasible. The proposed court fees are structured in ‘bands’; so, for instance, you pay £1,000 for an estate worth £500,000 and £4,000 for an estate worth £500,001; £12,000 for an estate worth £2,000,000 and £20,000 for an estate of £2,000,001. The scope for effective planning is self-evident, although not as simple as it might seem given many assets fluctuate in value. Whether the ‘banding’ approach will survive the final cut, however, is another question.
Unfortunately, the pain does not end there. A court fee of £4,000, let alone £20,000 is a lot of money. Property rich estates may require loans while estates with liquid assets may find that, after paying the probate court fees, there is not enough left to pay Inheritance tax. And you don’t have long to pay that (around 6 months). Otherwise, interest is payable.
HMRC managed to raise that rate of interest from 0% to 3% in September 2009, while raising the corresponding interest rate on repayments of tax from 0% to 0.5%; the only time on HMRC’s records the two rates have not matched. A government sleight of hand, if you like. It adds up, too. Properties are often the cause of Inheritance tax liability and, being illiquid, are most susceptible to interest accruing on that liability. At 3% that interest is now higher than the interest rate on many mortgages. At the time HMRC made the controversial change they stressed that interest was ‘not a penalty but compensation for tax paid late’. So, are they not now being over-compensated?
It seems a fair question, especially when one considers that this 3% rate still stands despite the collapse in interest rates the government pays on its own borrowing to historic lows. As of today, the government pays interest of around 0.8% per annum for borrowing money for 10 years (down from 3.5% in September 2009). Ten years is the longest period you can pay your Inheritance tax liability over. That means a conservatively calculated ‘spread’ of more than 2% for the government; and that doesn’t even factor in the interest ‘paid back’ to the government by the Bank of England on their £375 billion holding in government debt; which is, coincidentally, indemnified by the government.
If this seems unfair to you, then you may wish to consider planning to have liquid funds on hand, or indeed insurance in place, to pay inheritance tax and escape the interest trap.
Death and taxes, on the other hand; they are somewhat harder to escape from.
Call Mark Hopper, our Private Client Solicitor on 020 7998 7777 for more information or email him at firstname.lastname@example.org