BR Report 2019

36 37 BR AND NEW PROBATE FEES LATER LIFE TRENDS BIG RISES FOR BIG ESTATES FINANCIAL TENDENCIES AS WE AGE April 2019 was due to see the introduction of the new probate fee structure that the government first mooted in 2017. But, at the time of writing, the changes have not yet been implemented. The delay is a result of pressure on parliamentary time due to Brexit debates and motions, with the draft statutory instrument still awaiting an approval motion in the Commons. Once the motion is approved, the new probate fee regime will come into effect 21 days later. In England and Wales, probate is the process of applying for the legal right to deal with the deceased’s property, money and possessions. Individuals can apply or use a solicitor or another person licensed to provide probate services. Until these changes take effect, the current fee structure continues to apply with a flat probate fee of £215, or £155 if the application is made by a solicitor and no application fee charged if the estate value is under £5,000. The new fees will apply according to a sliding scale linked to the value of the estate. According to the Ministry of Justice, lifting the fee- free threshold to £50,000 will mean an extra 25,000 estates per year won't pay any fees at all. But for estates valued over £2 million it equates to a 2,700% increase in cost 30 and is expected to raise around £155 million a year. Some have already labeled it a stealth tax and there is speculation the changes have driven earlier payment of IHT due by larger estates in an effort to avoid the increases. Although BR can provide 100% IHT mitigation, it does not take assets outside the estate. Therefore any BR- qualifying shares will contribute to the value of the estate for probate fee calculation purposes. BR does, however, remain a good option for estate planning where speed of IHT mitigation, access to capital and absence of medical underwriting are important. For some estates extra probate fees will only equate to a few hundred pounds and put in the context of how much BR can save in IHT, that seems relatively little. For example, estates worth from £300,000 to £500,000 will be subject to an increase of £535. But if £100,000 of the estate was in BR- qualifying shares, £40,000 of IHT would be mitigated. One option to take assets outside of an estate in order to reduce both IHT and probate fees would be to place them in a trust. Shares that qualify for BR reduce the lifetime charge to IHT that applies to assets settled into trust (in excess of the available nil rate band) from 20% to 0%. They are also not liable to periodic or exit charges. But be careful. Fees for the establishment and management of the trust could be more than any probate fee saving. Stockpiling Cash The latest IHT statistics clearly demonstrate that, as we age, our assets accumulate along with our tax liability. As you might expect, the value of residential buildings within estates has been increasing. The value of securities also climbs as we gradually convert cash to pensions and annuities and perhaps invest to boost our reserves. However, when we might expect to see cash decumulation in later life, it jumps up considerably. One reason given for this by HMRC is, “insurance policies shift to cash as the age of the deceased increases. This is understandable since, at advanced ages, beneficiaries of a life insurance policy upon death of the holder, are more likely to receive this payment, and less likely to take such policies out themselves 31 .” It’s also safe to assume that the tendency to stockpile cash is a response to the changing demographic landscape. With increasing life expectancy, greater occurrence of health challenges like dementia and the care costs they bring, as well as ongoing family demands on older members, our immediate financial needs are more unpredictable. The bad news is that some things don’t change. Cash is vulnerable to both inflation and IHT, drastically reducing any left to pass on to future generations. This could be where BR solutions, with their investment element and access to funds, plus IHT mitigation after two years, could be a solution for the right clients. It’s also why keeping in regular contact with clients as they age and as their circumstances change is essential from an IHT planning perspective. ASSET VALUE AND TAX LIABILITY BY AGE BANDS (2015-16) SOURCE: INHERITANCE TAX STATISTICS 2015 TO 2016, HMRC, AUGUST 2018 Estate Value New fee £50,000 or exempt from requiring probate £0 £50,000 - £300,000 £250 £300,000 - £500,000 £750 £500,000 - £1m £2,500 £1m - £1.6m £4,000 £1.6m - £2m £5,000 Above £2m £6,000 NEW PROBATE FEES SECURITIES UK RESIDENTIAL BUILDING CASH TAX LIABILITY OTHER ASSETS Under 45 45-64 65-74 75-84 85 and over £1,000 £0 £2,000 £3,000 £4,000 £5,000 Asset value and tax liability (£m)