Administration of justice update
Administration of justice update: probate fee reforms: concerns from the frontline
‘STEP is very concerned about the proposed changes to probate application fees in England and Wales, which will be punitive for some families’ , writes Emily Deane TEP.
About the author
Emily Deane TEP is technical counsel at the Society of Trust and Estate Practitioners.
W hile the changes will exempt over one-half (57 per cent) of estates from probate application fees, the remaining 43 per cent will be obliged to pay between £300 and £20,000. For some families, this represents an enormous increase on the current flat fee, which is £155 if made by a solicitor, and £215 if made by an individual.
We are particularly troubled that the proposed fees do not bear any relationship to the service provided by the probate court. The fee appears to be an ad valorem tax as opposed to an administration fee. Nor does it bear any correlation to the cost of processing the application, which should be a nominal and straightforward exercise.
We also understand that the government needs to seek the approval of parliament before it can change tax levels or introduce a new tax, but this does not appear to be happening in this case. As MPs have a duty to ensure that taxes are not increased without valid reason, we have requested clarification on this point, as it does appear to have been overlooked. It seems evident that this is the introduction of an additional death tax rather than an administration fee.
We note that the HM Courts and Tribunals Service (HMCTS) is in significant debt, and believe that the public would accept an increased fee which is proportionate and consistent with other fee structures. To give a comparison, the Land Registry’s highest application fee is £910 for a scale 1 transaction for a property over £1m, which is significantly lower than the probate fees being proposed.
It also seems wildly disproportionate that a £2m estate will pay exactly the same application fee as one 10 times more valuable, at £20m. The proposed fees would be extraordinarily burdensome for a grieving family member, who would have to produce a sum of anywhere between £300 and £20,000 in order to obtain a grant of probate.
The payment of these high fees is also likely to cause problems for law firms. While these would normally pay the fee upfront on behalf of the executors, a firm undertaking a number of probate applications will not be in a position to cover the application fees.
If there are limited cash funds available in the deceased’s estate, the executors will have to apply for a loan to finance the application fee using the estate as security. This would incur further delays and costs, and would increase the administrative burden for both the executors and beneficiaries.
The IHT423 form to assist with the payment of inheritance tax was introduced in 2008, yet some banks will not accept this form of application and will not comply with requests from a practitioner or an executor. In the same way, banks are also likely to be reluctant to provide financing for the probate fee, particularly at its highest level.
It is worth considering whether an executor can validly charge the assets of an estate as security for a loan, as suggested in the Ministry of Justice (MoJ) consultation paper. If the executor does not obtain a grant of probate, or it is delayed, would the financial institution have the right to recover the advanced funds from the assets purportedly charged to it? While most financial institutions are willing to enable a grant to be obtained, they are coming under increasing pressure to ensure that any lending is appropriately protected. We foresee great difficulties with this proposed solution to the shortfall of the application fee.
It seems inevitable that many executors and beneficiaries will be forced to sell the family home in order to raise the requisite funds. Ironically, this is a scenario that the government is usually trying to avoid rather than encourage. For example, a surviving pensioner who has nominal cash available to pay the fee, particularly if cash has already been depleted due to nursing home fees, may well be forced to sell the home. There will also be farmers who are land-rich but cash-poor , and will be unable to find a sum as high as £20,000 from the estate. Children in their twenties and thirties may have been left the family home, but will not be able to obtain the large sums required to obtain the grant. Not to mention, of course, the charities that will be penalised by having to deduct a sizeable amount from their legacies.
We propose that the application fee should be fixed at a level which enables the probate service to cover its costs, and the MoJ has confirmed that it is already financially self-sufficient . However, if the government wants the rest of the court service to be self- financing, then it should introduce appropriate fees in other areas. Members of the public have no choice but to obtain a grant of probate, whereas pursuing a civil claim is voluntary; therefore, the probate service should not have to subsidise civil claims.
The consultation paper states that the probate service generates an annual income of £45m, which covers the cost of providing the service. This is a fraction of the £1.8bn annual running costs of HMCTS. If the new fee structure is implemented, the probate service will operate at a surplus of £256m - approximately 667 per cent of the cost of running the service. In the meantime, the other services run by HMCTS will generate income of roughly £655m, at a cost of £1.755bn, representing a recovery rate of 38%. Based on these figures, it is difficult to comprehend the fairness or proportionality of the proposed new scale of fees.
The MoJ suggests that the additional inheritance tax relief, which will be phased in and available to the public from 2017, will outweigh the proposed increase to the probate application fee. However, the requirements are extremely complicated, and for estates over £2m the tax benefit reduces, and then is completely unavailable after £2.35m. The tax relief will only be applicable in certain circumstances, and will provide no ‘offset’ where the estate is left to a surviving spouse, civil partner or charity. The increased fees may well penalise the individuals that the government claims it most wishes to support. Therefore, for most estates in the higher value bracket there is no corresponding benefit or interplay with IHT rates, and the probate fee is a significant and additional cost.
The MoJ’s consultation also presumes that families will have direct descendants to whom to allocate the relief, which may not be the case; for example, an unmarried sister living in the family home will not benefit from the new residential nil rate band. The same sister will also incur a significant probate fee on her death, when her share passes to a more remote family member, friend or charity. We understand that a review is required; however, some of the figures provided in the consultation are incorrect and there is little or no correlation to the IHT relief.
If the proposals are enforced, people will choose to put their assets into joint names or as joint tenants, with their intended beneficiary, whether it be their spouse or children or other, to avoid the application fee. This incentive may also increase the number of vulnerable people being persuaded to ‘gift’ their property to others in order to avoid the probate fee.
With the public endeavouring to arrange their assets in a way to avoid the requirement for probate, and hence avoiding the requirement to submit an IHT return, there will be an increasing number of estates where the obligation to pay IHT is not properly recognised. This could result in some significant financial loss to the government. STEP awaits a further consultation with the MoJ.
* Court Fees. Consultation on proposals to reform fees for grants of probate, available here. The consultation closed on 1 April 2016.
• • See page 4 of this issue for details of CILEx’s submission to the MoJ on proposals to reform fees for grants of probate