Thursday, 18 May 2017
How Does Probate Work and What to Expect in 2017?
In May 2017 a new tiered structure, or ‘death tax’, will take effect causing probate fees to rise dramatically. Estates over £50,000 will pay increased fees, with estates valuing over £2 million incurring up to £20,000 in additional fees.
When is probate required?
Probate is the legal process of managing a deceased person’s estate. It is required to administer their property, possessions and finances.
How does probate work?
1. The first step is to check the validity of the Will and verify entitlement to the deceased’s estate for beneficiaries. To determine the value of the estate, all the deceased’s assets must be identified, as well as all outstanding debts.
2. To administer the estate, you must apply for a Grant of Representation from the Probate Registry. This will give you legal authority.
3. Inheritance Tax must be paid to HMRC.
4. The deceased’s assets must then be sold and their outstanding liabilities settled.
5. Documentation of all payments to and from the estate must be recorded, showing the remaining balance to be distributed amongst the beneficiaries.
6. Finally, remaining assets and funds are distributed.
How long does probate take?
Probate takes 6-9 months to complete on average. This is if the deceased kept a clear record of their assets. However, there are occasions when probate can take years to complete, when the Will is contested for instance.
In UK law, the rights of creditors outweigh those of beneficiaries, as outstanding debts must be paid before shares of an estate are divided between beneficiaries. Bear in mind that tax owed by the deceased is considered a debt on the estate. Inheritance tax may also be payable. There is a threshold of £325,000, so estates under this amount do not need to pay inheritance tax.
In situations where debts exceed the value of the estate, the estate becomes insolvent.
Income tax & capital gains tax
Estate income is taxed at the basic 20%, while capital gains tax is payable at 28%. Gains made on the estate are assessed on the sale of an asset, calculated from the value of the asset at the date of death.
Reductions and exemptions in tax:
Inheritance bills can be reduced through various reliefs. For example:
- No inheritance tax is payable on assets under £325,000
- Assets and property left to a partner are exempt from inheritance tax
- Gifts made to charity in a Will are exempt from inheritance tax
- Gifts to provide reasonable maintenance for a child under 18 (or someone dependent on the deceased) are exempt from inheritance tax
- Up to £3,000 per year can be gifted, tax free
- Gifts of up to £250 each can be given tax free to any individuals
- Parents can give £5,000 as a wedding gift, and grandparents can give £2,500 without tax liability
- If the deceased owned shares in a private company or agricultural land, up to 100% business property relief can apply
Contested Wills and challenged estates
Any dispute is obviously distressing to the family of the deceased. Most Wills are contested if relatives believe they have been unfairly treated, or because insufficient provision has been made for a dependant.
Common reasons for dispute include:
- The Will was not property executed
- The deceased was of insufficient mental capacity to draft their Will
- The Will is invalid as it was made under duress
- There is a dispute involving property