Inheritance Tax Incentive For Charitable Legacies
Any gift to any UK charity (and from 1st April 2012 also to any equivalent organisation in the EU) is exempt from IHT (section 23 IHTA 1984). The Government has, however, made a further incentive for people to leave gifts to charities by introducing a lower rate of IHT. The aim is to help solve the funding difficulties currently faced by many charities.
Section 209 and Schedule 33 of the Finance Act 2012 introduced a lower rate of IHT of 36% (instead of the standard rate of 40%) for testators who die on or after 6th April 2012 and leave 10% of their net estates to charity.
This lower rate IHT incentive can be used by any testator, whose estate will be subject to IHT, i.e. whose taxable estate is above the nil rate band (currently £325,000). Understandably, the lower rate is irrelevant to a testator, whose entire estate is below the nil rate band, as there is no IHT to pay in the first place.
In practical terms, as a tax saving instrument, the 10% charitable legacy is only of a benefit to a testator, who already intends to make a charitable gift.
For example, for an estate that is valued at £500,000 for IHT purposes, where a full nil rate band of £325,000 is available and no other exemptions and reliefs are available (i.e. the baseline amount being £175,000), the following will apply:
|IHT rate||Actual IHT|
|Amount available to|
£175,000 at 40%
£430,000 (£500,000 minus £70,000 IHT)
£125,000 (£175,000 minus £50,000 charitable gift) at 36%
£405,000 (£500,000 minus £45,000 IHT minus £50,000 charitable gift)
As can be seen from the example, whilst the testator may prefer to pay less IHT to HMRC and at the same time benefit a charity, he will be effectively reducing the amount available to the non-charitable beneficiaries.
This IHT reduced rate incentive is therefore only likely to be attractive to a testator, who already intends to make a gift to a charity and where such legacy is short of the 10% threshold, i.e. that the testator increases the legacy, for example, from 8% to 10%.
It is also important to bear in mind that even if the testator gives 10% of his estate to a charity, that not all of his taxable estate may benefit from the reduced 36% IHT rate. It is necessary to look at the ‘components’ that comprise the estate (i.e. survivorship assets, settled property and other assets), in order to establish whether the reduced IHT rate will apply to the whole or only some of the components of the estate.
Please therefore feel free to contact our Trusts & Estates team on 01604 258 558, who will be able to advise you further on this. Likewise, our team would be happy to review your existing Will or draft a new one and provide you with other tax planning advice, or, if you are an executor or a trustee, we can assist you with the administration of the estate, including drafting a Deed of Variation to ensure that the deceased’s estate is handled in the most tax-efficient manner.