THE IMPACT OF THE CREDIT CRUNCH ON PROBATE AND ESTATE ADMINISTRATION
5/11/2009
“Encouraging savings is why I made my promise that only millionaires would pay inheritance tax.”
Conference watchers will recognise these words spoken by George Osbourne in his speech at the recent Conservative Conference. The speech from Gordon Brown the week before at the Labour Conference contained the equally vague statement as to the intentions of the Labour party - “the Conservatives want to cut inheritance tax for the 3,000 wealthiest Estates [in Britain], so that means even less money for frontline services.“
As a consequence, there is still no clear guidance for estate planners and practitioners on what is going to happen to the complex fiscal structure of Trusts and Estates following the 2010 election.
Credit Crunch Facts
Fact 1
Overall tax revenues continue to slump and as each forcast is released from the HMRC, the projected Inheritance tax drops.
Inheritance Tax Projections: Source HMRC Annual Receipts
|
November 2008 estimate |
£3.2 billion |
|
December 2008 estimate |
£3.1 billion |
|
April 2009 Estimate |
£2.9 billion |
|
August 2009 Actual |
£2.8 billion |
Fact 2
The UK economy has shrunk for five consecutive quarters, meaning the country has now been in recession for more than a year. Economists were expecting the UK economy to return to growth in the third quarter of the year, between July and September. However, leading financial institutions suggest the recovery will be slow, with unemployment remaining stubbornly high for some time to come.
Fact 3
An election must be held before June 3rd of next year.
Fact 4
No one knows if property has really recovered, if the collapse in share prices will be repeated or if the banks have really recovered.
With this backdrop, it is interesting to assess some of the changes in the market.
Inheritance Tax Revenues
The actual Inheritance Tax take in 2008/09 represents 0.6% of the total tax take, and overall changes to Inheritance Tax rules are “akin to cutting costs by saving paper clips”. The tax is expensive to collect and no longer fulfils its original intention. Initially designed to raise money from the very wealthy, it now penalises more and more members of the middle classes. This is confirmed in new data collected by HMRC for 2006-07 which shows that UK residential property now represents 50% in value of all Estates notified to them.
The impact of this drop is that on a pound for pound basis, the tax is becoming even more expensive to collect. Furthermore, there is further pressure with the Capital Taxes Office to increase the take and Inspectors have clearly taken a more aggressive stance in discussions with tax payers.
Interest Rates
HMRC have recently announced that the Interest Rate on unpaid Inheritance Tax has moved from 0% to 3% effective 29th September 2009. In the last 30 years, this Interest Rate has never moved more than 1% in any change and the statement has been made that the Interest Rate represents the loss of money for HMRC rather than a penalty rate because the tax payer has failed to pay up. The recent change of 3% is dramatic to say the least and is a sea change in thinking by HMRC. Those who have opted to pay Inheritance Tax by instalments may well want to reconsider if this is the best way to handle a continuing liability.
Property Values
Practitioners will be familiar with a problem that has occurred in Estates where the death took place in 2007 and 2008, and the taxable Estate includes property and Inland Revenue Accounts were submitted before the property collapse. In cases where the property cannot be sold, (and our experience is that there are many more examples of this), professionals are returning to the original valuations and finding that the probate (and taxable value) is considerably higher than the current value (leading to a higher taxable Estate value). Not unsurprisingly, clients are unhappy with this situation and in my earlier article, I suggested that HMRC may take a more pragmatic view on this.
However, any flexibility has now been removed. The most recent release from HMRC on Inheritance Tax focuses precisely on this point. The guidance states that “where the value of real or leasehold property has been agreed and accepted by HMRC on an Inheritance tax return, then that valuation is final and there are only limited reasons why the case may be re-opened. The recent fall in property values alone is not sufficient reason to re-open an earlier value…”
With this in mind, especially where deaths occurred in 2007 or 2008 and there are properties included in taxable Estates, advisers should look carefully at the provisions for loss relief claims (S191 HTA 1984) within 4 years after the date of death and how best to maximise the tax saving.
Stocks Shares and Securities
The stock market has rebounded since March and according to gfk NOP, a market research firm, consumer confidence rose sharply in September. However, try not to fall into the trap of thinking that the worst is over. It is still imperative to have controls and procedures in place in order to manage all Financial Assets in an Estate. By doing this, you ensure as soon as the Grant is received, the decision whether to retain assets or dispose of them is made with the Personal Representatives or beneficiaries, and actioned immediately. Values can still change materially in a short period of time.
Kings Court avoids the scenario of angry beneficiaries watching their asset values falling by agreeing early on in the life of an Estate what will happen to assets, and ensuring that any instructions are carried out immediately after the grant is received.
Cash in the Estate
Six months ago a common problem in Estates (especially where the principal asset was the family home), was finding the necessary funds to pay the liabilities and expenses, as well as the fees of the administration. Clients are now taking a much more pragmatic view and the former reluctance to put a property on the market is gradually dissipating. While this has reduced the pressure in administering Estates, we have also noticed a definite trend among beneficiaries to look carefully at Estate accounts, to question where funds have gone and generally to take more interest in the financial mechanics of an Estate.
This means that practitioners need to have in place systems to allow accounts and financial reports to be preared regularly on demand and to be responsive to the needs of the Personal Representatives and the beneficiaries. Kings Court is currently running a pilot system to allow direct access into our case management program, giving clients the ability to access assets and liability summaries. This not only cuts down the number of queries but gives the clients conrol over the numbers.
The Future
Pessimists will look into their crystal balls and continue to see a gloomy few years for the economy. Even with an opposite view, the prudent probate practitioner must expect a more aggressive stance from the Revenue, the need for tight controls on how and when assets and liabilities are handled within the administration and a client with higher expectations on the level of service they need. We believe this means that the efficient, client focussed, system driven professional business will thrive.
For further information please contact William Feeny, Director, Kings Court Trust Corporation