If this is you, you’ll need to either raise the cash to pay off these fees, or hope your loved ones can foot the bill once you’ve passed on.
You probably don’t want to think about it, as Victor Sacks an IFA at VS associates says:
Problem is, a lot of people think that addressing their financial affairs as described, is predicting their demise, so will put it off
Don’t be one of those people, plan and prepare for the inevitable. Keep reading to find out what’s changing and how it will cost you.
Inheritance Tax – if the value of your estate (ALL your belongings, savings, property etc.) is below the £325,000 threshold, or you intend to leave everything to charity or your partner, then there’s no inheritance tax to pay. If you don’t meet those criteria, then you’ll be charged a huge 40% which will be taken from your estate before your family even get to see it.
Example: you have an estate worth £500,000 in total, with no debts or Life Insurance, the inheritance tax due will be £70,000. That’s 40% of the £175,000 of your estate that’s above the threshold.
TIP: if you do leave everything to your partner, their inheritance tax threshold will jump up to as much as £650,000 to take care of both of your estates.
It should be noted that this will change in the future: Osborne announced in July 2015 that by April 2020 the threshold will be at £500,000 per person. Meaning combined with your partner, you have a massive £1m that you can leave behind that’s exempt from Inheritance Tax.
Probate Costs – Probate is the legal process of dealing with a persons estate once they pass away. Currently the costs of probate are £215 as an application fee, but under the current system, the rest of the process will be paid for by HMRC. Right now, your family won’t have to do anything but pay that £215, submit the forms and wait… for up to 3 months, which sucks. But still, it’s mostly free, and if you take some simple precautions you can avoid probate all together.
If, however, there are any complications (e.g. foreign property, complex arrangements, doubts in the validity of the Will, bankruptcy) you might consider hiring a probate specialist… this could cost your family up to 5% of the value of the estate PLUS VAT! Other specialists might work on hourly rates, but either way it’s still going to be an expensive process.
This is the current probate process that you’ll experience:
First of all, you die. It’s not nice to think about, but it is going to happen eventually. After that, your friends, your family, your assets and your legacy will live on.
Then your family will need to find out if you left a Will. If there’s no Will that states who will sort out your estate, then your next of kin will generally apply to do this. Don’t know or get on with your next of kin? Doesn’t matter, probate will pick your next of kin for you.
Next they’ll need to apply to get a grant of representation, which gives them the legal right to access all your things like bank accounts.
Then the fee is due – any Inheritance Tax that is due will be paid off here, either taken from your assets or paid for by your family.
After that, your family can collect your estate’s remaining assets. This could be your home, money from the sale of your home, any savings or belongings you may have left behind.
At this point, any debts that you left behind should be paid off: unpaid bills, loans etc.
Finally, after all of that, the estate will be divided up to who you wanted it to go to, your ‘beneficiaries’. Unless you didn’t leave a Will, in which case it will go to the designated next of kin.
The government is planning to introduce a new ‘sliding scale’ of fees for probate services. Only those with estates worth less than £50,000 will be exempt from these new charges.
Estates that are worth between £1.6m and £2m will be charged £12,000. To put that into perspective, the average detached house in our hometown Chelmsford is £515,143… that’s already halfway to a million, before you add on any savings and belongings you have. Do you have £12,000 spare?
The proposed new probate fees (before inheritance tax)
When will this happen? We’re not entirely sure, but the plans are fairly certain to go ahead. The government has said that these new fees will make a significant contribution to reducing the deficit and transform the courts and tribunal services.
Below are the 3 solutions that you should be thinking about:
Put it in trust!
Writing your assets into trust means that you can avoid the fees and probate altogether. This legal agreement means that you appoint someone as a ‘trustee.’ When you pass away, your assets will go to this trustee who is responsible for them until they are passed on to the ‘beneficiary’ – the person/people you want your assets to go to. By putting your assets into trust, they avoid inheritance tax and these new probate costs too.
Make sure that you own any assets jointly with a partner. This is especially for property – make sure it’s in your partners name too, so if you are to pass away, it will go to your partner without any probate. The key here is making sure you’re married, in a civil partnership or tenants in common, and they own the property with you.
You might be able to calculate an estimate of how much tax your family will have to pay from your estate… if this is the case, then you should consider some Life Insurance. Usually Life Insurance is there to give your family a pay-out when you die, but if you’re leaving them a great deal of assets in your estate, this might not be something you want. The idea is, take out a Life Insurance policy so that when you are to die, the cash paid out to your family will make up the parts of the estate that were lost when inheritance tax was paid out.
If you’re interested in making some secure financial plans for the future, give us a call on 01245 850 150 or 0800 028 4268
We’d be happy to help you!
Inheritance Tax: HMRC
Chelmsford House Prices accurate as of 20/07/2016, sourced from Zoopla