Put your house in order

Posted on: 23-05-2016

By making plans for your legacy ahead of time, you can make sure your family don’t face an unwanted burden.

Estate planning: it’s complicated, it’s time-consuming and it’s becoming increasingly expensive. Although, understandably, you don’t want to spend time contemplating your own death, if you don’t make plans your family could face some major headaches sorting out your affairs.

When it comes to dealing with your possessions, such as your home and finances, the will executor (often a family member) will have to arrange a grant of probate. This involves applying to the Probate Service and paying a flat fee of around £150-215. However, the government has announced plans to introduce a sliding scale for how much you have to pay, tied to the size of your estate. The consultation period ran until 1 April 2016, with a further announcement to follow.

In the most extreme case – an estate worth more than £2 million – it could mean that the cost of obtaining a grant of probate goes up to £20,000. For a more modest sized estate above £300,000 but below £500,000, the fee would rise to a not inconsiderable £1,000, and for an estate above £500,000 but less than £1m it would be £4,000. When you total up the size of your estate, you might be surprised by how much it is worth. Your loved ones could have to find a four figure sum of money just to begin the proceedings of distributing it.

And that might just be the start of the financial concerns. If your estate is above a certain threshold point, 40% inheritance tax will be charged against everything above it. This could result in a tax bill that runs into thousands of pounds. It would also have to be settled before your family can inherit your estate. If they fail to do
it within six months, interest starts to be charged on top.

The inheritance tax threshold is £325,000. If someone’s estate is less than the Inheritance Tax threshold of £325,000, the remaining threshold can be transferred to their husband, wife or civil partner’s estate when they die. This means the surviving partner’s estate can be worth up to £650,000 before any Inheritance Tax is due. The government is introducing a new main residence nil rate band allowance from next year, which will eventually mean a married/civil partnership couple can potentially leave an estate worth up to £1 million inheritance tax-free. However, there are certain qualifying rules which means not everyone can benefit from this extra allowance. For example, it can only be used to leave your main home to a direct descendent.

The double issue of the grant of probate fee, and inheritance tax, could prove painful. Let’s say you are divorced with an estate worth just over £500,000. Under the government proposal, it would cost your family £4,000 to obtain grant of probate to access it. As you are also over your inheritance tax threshold by £175,000, your estate would incur a £70,000 tax liability. So they would have to find £74,000 – plus legal fees – to sort out your affairs.

This underlines just how important it is to put plans in place now. There are a number of ways you may be able to reduce any inheritance tax liability your estate carries through some simple planning. Although the grant of probate fee might prove unavoidable, you can at least make arrangements to address it now, to remove the burden.

By sitting down with an expert, you can aim to ensure that – when your time comes – your loved ones won’t face the extra pressure of extra bills when dealing with your finances. A clear plan can spring into action that addresses the problem, so they get to inherit as much of your estate as possible.

The Financial Conduct Authority does not regulate taxation and trust advice.

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