Thousands of bereaved families face huge delays when dealing with a late loved one’s affairs as a result of a meltdown in the probate office.
Five years ago, getting a grant of probate took around ten days from when you placed your application. It now takes around three months. Combine that with the time needed to prepare an estate for the application and solicitors warn it is taking up to a year for probate to be granted.
So terrible is the wait time that families are now at risk of hefty interest fines for not paying taxes due on time.
The extra stress is a heavy burden on already grieving relatives, but through careful planning, it is possible to spare your family the administrative nightmare and make sure they have no trouble beating the tax clock.
The Government expects inheritance tax bills to be paid within six months of a person’s death. Then interest starts to be charged on the bill at a rate of 7.75 per cent.
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If grant of probate is not issued in time, executors can struggle to find the money to pay the inheritance tax bill. This is particularly difficult if the bulk of the estate is an illiquid asset such as a property that needs to be sold.
Greg Fletcher, solicitor at law firm Cripps, says: ‘Inheritance tax must be paid by the end of the sixth month after death. This deadline poses significant problems if the main value of an estate is tied up in the family home. HM Revenue & Customs recognises this and allows tax due on real estate to be paid in ten annual instalments, but interest will still run from the end of the sixth month after death.’
The average inheritance tax bill is £214,000, according to government figures. Interest on that would be £319 per week. If it took 12 months for executors to sort out that estate, apply for probate and the grant of probate to be issued – as many solicitors now warn it will do – the tax bill would have grown by £8,294.
One solution is to take out a whole-of-life insurance policy today, so your family has immediate access to cash when you die, with which they can pay the inheritance tax before any interest needs to be added. Bear in mind that only four per cent of estates end up paying inheritance tax.
Taking out a policy would mean you will pay premiums for the rest of your life but when you die, the policy will pay out enough to cover your tax bill. It could be a great stress relief to know your family won’t be left scrabbling to pay the taxman. For this plan to work, though, you need to place the insurance policy in a trust, as Greg Fletcher explains: ‘With inheritance tax, if the policy pays out to your estate, it will increase the value of your estate and the associated inheritance tax.
‘If, on the other hand, the policy is written in trust and pays out to named trustees, it will remain outside of your estate and no inheritance tax will be payable on the value of the policy on your death.’
The other advantage of placing the insurance policy in trust is – as the trust deed gives your trustees the power to administer the policy – it can be paid out immediately upon your death without needing probate to be granted. This means trustees can then settle your inheritance tax bill without a wait.
While this trick can relieve a huge burden for many families, it will not work for everybody. The premiums on this kind of policy tend to be high, so it is best suited to people who are facing a substantial inheritance tax bill – perhaps like wealthy crime novelist Harlan Thrombey in 2019’s Knives Out, whose death sparks a tangled web of intrigue over his fortune.
For example, a £1 million whole-of-life policy taken out by someone in their 50s will probably cost around £300,000 in premiums if they live until they are around 80. A whole-of-life joint policy paying out £214,000 – the average inheritance tax bill – would cost £175 a month for a couple in their 50s.
Petronella West, chief executive at wealth manager Investment Quorum, says: ‘While you will never benefit from the policy, the premiums you pay will almost certainly be substantially less than the ultimate payout your family would receive from the insurance company. The younger you take it out, the cheaper the premiums and the better off your estate will be, but don’t commit to a cost you cannot sustain through your lifetime.’
If you start paying premiums then at some point can no longer afford them, the policy will be cancelled and you’ll lose all the money you’ve already paid.
West gives the example of a family she has advised – John Wilson, 48, and wife Jane*, 38, with two young children. They have substantial wealth thanks to the sale of their company. Having sought financial advice, Mr and Mrs Wilson expect to face an inheritance tax bill of around £10 million when they have both died.
West recommended they take out a joint life, second death, whole of life insurance policy that is written into trust. The policy will pay out £5 million upon their death and cost them £38,000 a year, which they can afford to pay out of their income.
West says: ‘We did not recommend covering the whole inheritance tax liability of £10 million with the insurance payout as John and Jane plan on making future charitable gifts, which will reduce the value of their taxable estates. It would have also increased their premiums substantially.’
The Wilsons’ insurance policy will be placed in a discretionary trust for the benefit of their executors to use to pay the inheritance tax bill. Most insurance firms have a standard trust deed template that you can complete to place your policy into trust, but it is wise to get advice from a solicitor.
You need to be very careful in setting up the life insurance policy as once you have placed it into a trust you can’t change your mind. It cannot be reversed. A letter of wishes is a document you write yourself to sit alongside your will. While not legally binding, it can contain useful extra information for your executors and family.
West says: ‘Having been witness to many family squabbles and horrible disagreements, I always recommend that families discuss things together before someone dies. But if that is too difficult, using a letter of wishes to give guidance to the executors always helps. Where there is a lot of money and young adult children involved, it can be a good idea to write down who they can talk to and trust now that Mum and Dad are not there to offer advice.’
* Names have been changed.
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