Investors face extra cost from probate change

Investors face extra cost from probate change

Estates holding investments that qualify for Business Property Relief could face higher probate fees following plans to introduce a tiered charging system. 

BPR-qualifying investments have become increasingly popular to mitigate IHT as certain holdings become exempt once they have been held continuously for two years. 

But now, according to Way Investment Services, an issue has arisen because the qualifying investments are part of the gross estate and count towards the calculations for the probate fee due.

Probate fees are set to rise in April under a new banded structure which will see the nil rate band lifted to £50,000 but above this there will be an increase in fees with a maximum charge of £6,000 for estates worth £2m or more.

Under the tiered structure estates including BPR investments could be pushed into a higher bracket, thus create a higher cost than originally planned for, Way Investment Services warned. 

The inheritance tax specialist suggested families making use of BPR as a means to mitigate inheritance tax could benefit from setting up a trust to cover potential probate fees and legal costs, as well as any IHT bill. 

John Humphreys, IHT specialist at Way Investment Services, said: "Aside from the greater volatility typically associated with AIM investments in comparison with more conventional, lower risk, investments, investors holding BPR-qualifying investments need to be aware of how it will affect the calculation of their inheritance tax liability and probate fees. 

"Families who are looking for peace of mind can set up a trust, including a letter of wishes requesting the trustees to release funds to cover any probate fees and any associated legal fees to obtain probate, as well as providing a means to pay an IHT bill.

"That way lengthy probate issues and delays in being able to access the estate can be avoided, and from the government’s point of view, inheritance tax bills can be settled sooner."

In addition to being held continuously for two years, to qualify for IHT exemption the investments would also have to remain BPR qualifying. 

Mr Humphreys warned the status of the company could change, which could result in a change as to whether or not it qualifies for BPR.

For example, a company might grow and become listed on the main stock exchange, or go into administration therefore losing IHT exemption. 

Mr Humphreys added: "An issue with BPR investments is that a scenario could arise where, from an investment perspective, it makes sense for an investor to sell a holding, but they hold on to it purely as part of an IHT-mitigation strategy  – which would be very much a case of the tax tail wagging the investment dog."

These warnings echo a similar stance taken by Neil Liversidge, managing director of West Riding Personal Finance Solutions, who told FTAdviser that those advisers who don’t routinely write policies in trust could end up facing claims.