Legacies Roundup | December 2018


Charity Legacies

In our last Legacies Roundup of 2018, we consider the government’s proposal to increase probate fees and what it means for the charity sector, take a look at HMRC’s review of the taxation of trusts, and look back at some of the other issues legacy professionals have had to tackle this year.

Probate fees – a stealth tax for charities?

Experts and sector professionals alike have expressed concern at the government’s announcement that it is resurrecting its previously abandoned proposal to increase probate fees by a significant amount.

In case you have missed it, the proposed changes will abolish the current flat probate fee of £155 (or £215 for individuals applying directly and not through a solicitor), and replace it with a sliding scale of fees based on the value of the estate – up to almost 28 times higher than the existing fee. Although the proposal would see estates worth less than £50,000 exempted from having to incur any fee, it will nevertheless represent a significant additional burden on many estates – including those left to charity.

The work of the probate court to issue a grant of representation is no different whether the estate is worth £10,000 or £10,000,000. Additionally, it is already acknowledged by the Ministry of Justice’s own impact assessment that the existing fees already cover all of the probate court’s costs. The proposed fee increase is wholly designed and intended to cross-subsidise other areas of the court service’s work, and bears no relation to the costs of obtaining probate.

It comes as no surprise, therefore, that several commentators have referred to the proposed new fees as amounting to a “stealth” tax, particularly for charities. There is an exemption from inheritance tax for legacies left to charities: but there is no such exemption from probate fees. Under the new proposals, even estates left entirely to charities will incur the much increased fees, reducing the amount of money charities will receive. Also, if an estate cannot afford to pay the probate fee – which must be paid upfront before the executors can access estate assets – it often falls to charities to fund the fee, or risk the executors having to take out a loan with the estate bearing the interest payments. This is likely to become more of an issue with the significant fee increase.

The Society of Trust and Estate Practitioners (STEP) has commented that “the charges bear no relation to the cost of probate and are simply another form of taxation, sneaked in through the back door”. The Institute of Legacy Management (ILM) has warned that the proposed changes could cost the charity sector £10 million in legacy income. Remember a Charity agrees and has warned that charitable wills could cost up to thousands of pounds more than they currently do. Remember a Charity also points out that testators, conscious that their families will be affected by the more significant costs of estate administration, may be put off leaving charitable gifts altogether. Christopher McCall QC, a leading charity law specialist has also condemned the resurgence of the proposals, opining that they contain “neither logic nor justice”, describing them as “tax by another name”.

Leticia Jennings, partner at Bates Wells, has commented:

“The government’s proposed changes to probate fees essentially amount to a taxation of inheritance left to charities – the very opposite of what the Inheritance Tax regime is intended to achieve. It is concerning – and at odds with usual government treatment of charities – that the proposals do not contain any kind of charity exemption. I am not surprised at the sector’s reaction to what the government is proposing, or its attempts to justify what is clearly a vehicle for cross-subsidising the court system. I hope the government takes note of the very serious and legitimate concerns raised and reconsiders its position in particular in relation to charities”.

We will continue to monitor the progress of the proposals and the government’s response to the sector’s concerns.

HMRC consultation on taxation of trusts

On 7 November 2018, HMRC released its consultation document “The Taxation of Trusts: A Review”. The consultation seeks views and evidence on whether current taxation of trusts reflects the principles of transparency, fairness and simplicity. The policy principles which the government is using to test the system are that trusts should not be used to hide beneficial ownership of assets; taxation of trusts should be fiscally neutral (that is, that tax considerations should neither incentivise nor disincentivise the use of trusts); and trust taxation and its administration should be straightforward.

Among other things, the consultation also looks at the deduction of trust management expenses against income which can reduce income tax liabilities.

Of particular note for legacy professionals is the government’s request for views on situations which may not be considered “tax neutral” in relation to inheritance tax, such as tax planning by making lifetime transfers using the nil rate band, and the differing impact of the inheritance tax regime on different types of trust including lifetime relevant property trusts and those set up by Will (“Will trusts”).

Will trusts are a type of trust created by a will out of assets in an estate. They can be subject to life interests, and can be subject to quite complicated tax treatment, particularly if the beneficiaries are a mixture of exempt beneficiaries (e.g. spouses and charities) and non-exempt beneficiaries. The government wants to consider whether the different regimes for taxing these different types of trusts (some taxed on the death of a beneficiary, some taxed periodically) “is the right framework to tax settlors, trustees and beneficiaries to IHT in the future”.

Whilst the consultation looks to be based on sound principles, we think it pertinent to note the recent report released by the House of Lords Economic Affairs Committee, which found that HMRC is failing to guarantee fairness for taxpayers by failing to differentiate between those who use sophisticated tax avoidance schemes and ordinary citizens who break the law through uninformed or naive actions. It is important that the broad scope of the consultation is supported by appropriate research and a broad range of evidence from industry experts and professionals.

The consultation period ends on 30 January 2019. We will keep you updated as to the results, further input and what impact any future proposals may have on your organisation.

A look back at some of the key legacy issues of 2018….

Protect yourself from a data protection mess – the GDPR

On 25 May 2018, the GDPR 2018 came into force, reforming the data protection landscape in the EU and the UK. In preparation for the implementation of the GDPR and the UK’s Data Protection Act 2018, Bates Wells produced a series of guidance notes and resources to ensure charities were prepared to respond to and proactively manage data protection related issues throughout the entire legacy fundraising and administration process. In case you missed them, take a look at our GDPR for Legacy Professionals factsheet, our September Roundup blog post discussing Larke v Nugus requests, and, exclusively for ILM members, our GDPR factsheet produced in partnership with the ILM.

Protect your charity from legacy fraud

Charity Fraud Awareness Week 2018 took place between 22 October and 26 October 2018. Unfortunately, charities can be vulnerable to fraudulent activity from both internal and external stakeholders at all stages of the legacy process. We discussed some of the key issues on our Legacies Blog to remind charities how to best protect themselves against fraud.

Online wills – the future is digital

The future of will-writing was a hot topic for discussion in 2018, with industry experts and professionals keen to explore the risks and opportunities that inevitably accompany online will-writing. For charities where legacy fundraising is a key priority, analysing the issues is of particular importance. Read Leticia’s  legacy blog post for a deeper look at the arguments.

Getting to know a gift of property

Receiving or making a gift of property can be one of the most valuable transactions for charities. However, it also raises some important issues that charities should be alert to, and prepared for. Earlier this year we put together some key resources to assist charities in understanding how the procedures on disposing of interests in property under the Charities Act 2011 apply to their property legacies, as well as best practice principles to follow when dealing with property received either as an outright gift or subject to a life interest. See our Charities Act Compliance Checklist and Dealing with Gifts of Property factsheets.

As always, we recommend that you seek prompt legal advice on any of the issues mentioned above.

Thank you so much to all our 2018 readers. We will be back in the New Year with more legacy related content, and in the meantime we wish you and your families a very happy Christmas.

This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.

All content on this page is correct as of December 13, 2018.