You can reduce your inheritance tax liability by giving to charity

Posted by Alison Craggs on
From 6 April 2012 people who leave at least 10% of their net estate to charity can pay a reduced rate of inheritance tax (IHT) of 36% instead of 40%.

The Government's aim is to boost charitable giving. The take up of the reduced IHT rate will depend to a large degree on the extent to which it is promoted by charities and they should be alerting donors to the new rules.

The new relief is significant for anyone with an existing Will or anyone seeking to make a new one. It is also significant for personal representatives administering an estate of a person who has died on or after 6 April 2012.

How does the reduced rate work?

The case studies and table below illustrate how leaving a gift to a charity in your Will can reduce your IHT liability.

Mr Not-Give died on 10 April 2012 with an estate worth £340,000 leaving everything to his children. His available IHT threshold was £325,000 (2012/13 tax year). IHT at 40% would be payable on £15,000 (£340,000 less £325,000) so £6,000. The children receive £334,000.

Mr Give's position is exactly the same, save for the fact that he has left 4% of his net estate to charity in his Will. We use "net estate" to refer to the part of his estate that would be taxable but for charity relief. (The legacy to charity could be by way of a cash legacy, a gift of specific items or a share of residue.) The children would only receive £360 less than in the example above and £600 would pass to charity.

Under the new rules, however, Mr Give can do much better. If instead he increases the charity legacy to 10% of his net estate, then the children still inherit the same amount, but the charity receives more and the Revenue takes the hit.

 Mr Not-GiveMr Give - 4% to charityMr Give – 10% to charity
Estate on death £340,000 £340,000 £340,000
Less IHT threshold £325,000 £325,000 £325,000
Net Estate £15,000 £15,000 £15,000
Less charity legacy £0 £600 £1,500
Taxable Estate (taxed at 40%) £15,000 £14,400  
Taxable Estate (taxed at 36%)     £13,500
HMRC receive £6,000 £5,760 £4,860
Children receive £334,000 £333,640 £333,640
Charity receive £0  £600 £1,500

The family members will always receive less as a result of the combined effect of the charity legacy and the tax, but the reduction in the rate of IHT should encourage charitable giving.

Do I need to change my Will?

If you have already made a Will which leaves some of your estate to charity you may wish to review this to check whether the legacy satisfies the 10% test and consider whether you want to increase the charitable legacy so that your estate can qualify for the reduced rate.

Varying a will after a death

If you are a personal representative of an estate where the deceased died on or after 6 April 2012 and did not include a charitable legacy in his Will, (the Mr Not-Give example) or where the legacy is not sufficient to meet the 10% test (the Mr Give 4% to charity example), then the beneficiary/ies may wish to consider varying the Will by entering into a Deed of Variation to make or increase a charitable legacy so that the estate can benefit from the reduced rate.

About the Author

Alison advises clients on the best structure for their Wills and prepares powers of attorney and administers estates. 

Alison Craggs
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