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How the new £20,000 death tax could cost some families as much as £66,000

Will document and pen
Probate fees will depend on the size of your estate, as well as how ownership of assets is structured

Consultation closed last week on the proposals that would see a huge increase in the probate fees paid by almost all estates.

From a flat-fee system - designed to cover court costs, which it currently does (more below) - the Government wants to introduce fees based on the size of the estate involved.

This will slap a huge additional cost on millions of families.

It comes as inheritance tax takings are also rapidly rising, and likely to be their highest ever in the tax year just ended.

When you take into account the fact that the fee has to be paid out of the estate after inheritance tax has been paid, and factor in different ways in which property and other assets may be owned, it is possible that the total cost to some couples would be as much as £66,000.

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Today's system applies two flat fees to the probate process: £155 where the probate is applied for by a solicitor and £215 where the applicant is any other individual.

What the Government wants to introduce is a sliding scale of charges based on the estate's value.

Estates valued at more than £300,000 (currently one estate in 10) will attract a fee of £1,000. More than £500,000 and the fee is £4,000. Over £1m it jumps to £8,000. The highest bracket, for estates worth £2m or more, is £20,000.

The outcry has been significant.

But many people haven't realised that the fees can be deducted from an estate only after inheritance tax has been applied.

So with larger estates the Government achieves a double whammy: it takes the higher fee, which far exceeds the cost of granting probate, and it also takes 40pc inheritance tax.

An estate that falls into the £20,000 fee band will in effect lose £33,000: 40pc of which will be the usual slab of death tax.

But how could it be even more than this?

In certain cases, depending on how property is owned, a wealthy couple could face two probate fees on their assets: one arising at the death of the first and then another again at the death of the second.

Where married couples own a property jointly  as "joint tenants", the surviving person automatically inherits the dead person's share. Probate doesn't apply.

But where they are "tenants in common", with separate ownership of portions of a property, probate will apply on the death of the first and the second.

John Bunker, a tax lawyer at Thomas Eggar, points out that provided the property is sufficiently valuable, probate fees of £20,000 (£33,000 including inheritance tax) could apply to each of an unmarried couple at death, giving rise to a estate losing a total £66,000.

Where couples are married, and property is left directly to a spouse, there is no IHT on the first person's death.

He warns that families' attempts to avoid these fees could result in other problems.

"Obviously, lawyers will need to help families plan.

"In many cases people will wish to move from being tenants in common to joint ownership as a way of cutting probate costs.

"But there can be other consequences of this, which may not be in the families' best interests."

One scenario, perhaps, would be where property ownership as tenants in common had been the way of ensuring children from a previous marriage received a property inheritance at the death of a spouse.

Where ownership is changed to joint tenancy, the surviving spouse would have control over the property and could exclude the children in a subsequent will.

How it used to be...

Part of the Government's justification of the change involves looking back at the system that applied between 1981 and 1999.

Then, it's true, the fees were related to the size of the estate. But the numbers were small.

The first £100,000 of any estate attracted a fee of £250 and every successive £100,000 attracted an additional £50.

So a £2m estate would pay £700.

That was in a distant land where property prices were a fraction of today's level, and where far fewer estates reached those thresholds. And £700 is a far cry from £20,000.

A fee or a tax? This is called a fee but it is being turned by the proposals into a tax.

Fees are levied to cover costs incurred in a specific process. Taxes are levied to raise money for wider public spending.

The Government says that income raised through current probate fees "reaches full cost recovery of the Probate Service". But the consultation goes on to say: "In light, however, of the current financial circumstances, we need to go further to reduce the overall demands of the courts on the Exchequer." That's where it becomes a tax.

There is something sneaky in blurring the boundaries between fees for services delivered by public bodies and general taxation.

Promises about keeping tax low, or cutting it - and the Conservatives have made many such promises - flake away when the fees charged for public services are suddenly seized upon and used as a means to raise wider revenues.

John Bunker thinks some people might rashly give money away to avoid the fee, while others will struggle to pay it where estates hold little ready cash.

"Why not raise extra money through general taxation?" he asks. The answer is that estates are easy targets.

This is an inheritance tax, trying to pass itself off as a fee for a service.

 

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