I try to avoid getting too hot under the collar about taxation and government fees, but the proposed Ministry of Justice increases to probate fees on bigger estates is quite simply outrageous and the industry needs to start shouting.
I am sure most advisers are familiar with probate, particularly as estate planning is becoming an increasingly substantial part of many advisers’ work. Many will be aware of the proposed changes and there are some financial planning techniques that will protect clients, but the changes do not augur well.
Despite almost universal opposition, the Ministry of Justice is blundering on with its proposals to hugely increase probate fees for bigger estates. It may implement the changes as early as May in a move some experts say will raise £300m in revenue annually.
This is even though the move may be ruled ultra vires (effectively unlawful). As Old Mutual Wealth has pointed out in a criticism of the plans, the Joint Committee on Statutory Instruments recently produced a report questioning whether the change was intra vires.
Dangerous precedent
I believe the probate change is not just a stealth tax, it also sets a dangerous precedent that could be replicated by other government departments as a backdoor move to raise taxes on those who will be unable to do much about it. The huge rise in some probate fees effectively taxes the dead, or rather their estates, which is pretty much the same thing, a death tax if you like. The government has, of course, tried to be clever, saying that probate fees will be scrapped on small estates to sweeten the poison.
It is worth exploring what the changes will mean. The fixed fee at present for getting probate for all estates is currently £215. The Ministry of Justice, however, wants to move to a tiered system of charges depending on the value of the estate. Apart from the fact there is no obvious reason for this except to raise money, the changes are not logically thought out.
The plan is for estates below £50,000 to be exempt from charges. On estates above £50,000 there is a sliding scale of charges that rises rapidly. For example on estates of £50,000 to £300,000 the cost of the new probate fee is £300, but that rises to £1,000 for estates between £300,000 and £500,000 and for estates above £2m the charge would be a whopping £20,000. And, of course, this is on top of any legal fees.
So if you have the misfortune to have the new rules applied to your estate after May, the fee being demanded by the government will rise from £215 to £20,000. That will probably go down as one of the biggest percentage fee increases in the history of government taxation.
Some will say, well if they had estates of more than £2m (likely to include quite a few clients of advisers and planners) they should pay a bit more to cover the work involved. Fair enough. A bit more, yes, but there is little or no connection between the size of the estate and the amount of work involved in granting probate.
While the Ministry of Justice insists that 90 per cent of estates will pay £1,000 or less, this implies that one in 10 people will pay a lot more, sometimes a huge amount more for no particular benefit.
Double taxation
What further concerns me is that in all likelihood the money in the estates of the deceased has already been mostly taxed. This is double taxation on the deceased.
In addition, why should someone with an estate worth £2m effectively see 1 per cent taken away by the government when someone with an estate worth £999,000 would see only 0.1 per cent swiped.
This is also a progressive tax. As we have seen with higher rate tax thresholds being held back over a number of years, eventually more and more people will be dragged into the probate tax net. With the high price of property in some parts of the country and a different approach to pensions following the freedoms it is likely more and more estates will top £2m and the government knows this.
There is no doubt that pension freedoms are being used to avoid annuities and retain greater value in pension pots to pass on to heirs. Estates could soar in value over the next 10 years. Also of concern is that this approach may be replicated. Standard fees for all sorts of government charges could be replaced by tiered and graduated taxation system.
There is, unfortunately, every chance the Ministry of Justice will get away with this or offer a small sop to push it through, but there is still time to object. The changes are due to be debated in the Commons after Easter so do lobby your MP, professional body or whoever. Your clients will thank you one day.
Kevin O’Donnell is a financial writer and journalist
