The Finance Bill 2012 introduced legislation to reduce the inheritance tax rate applied to an estate where 10% of the net estate is left to charity.
The Current Position
Every individual has a nil rate band, the amount that can be given away before inheritance tax is owed, currently £325,000. If your estate is worth more than £325,000 or your nil rate band has been used up through lifetime gifts, inheritance tax at 40% is payable on the remainder. Currently any gift left to a charity under a Will is free of inheritance tax and in addition gifts to a spouse or civil partner pass free from inheritance tax (these are known as exempt beneficiaries). Therefore if your estate constitutes only assets left between a surviving spouse and a charity these new rules have no benefit to you.
The New Legislation
The new rules provide a tax incentive to leaving a certain amount to charity. It should be noted that this is a cliff edge test and so if you gift under 10% of your estate to charity then there is no reduction in the inheritance tax rate. The 10% is calculated by reference to the value of your net estate (after deduction of all liabilities, the nil rate band and any other exemptions). So if your estate, on your death, was £1,000,000 and after deduction of the nil rate band and liabilities it was £600,000 £60,000 would need to be left to charity to have the remainder taxed at 36% reducing your inheritance tax liability from £240,000 to £194,400.
These new rules will be of interest to anyone whose estate exceeds the nil rate band and wishes to benefit non exempt beneficiaries for example children. In gifting 10% of your estate to charity on your death you are lowering the rate at which inheritance tax is paid on the remainder, but your children do lose part of their inheritance to the charity. The charity will benefit from the legacy, but not the reduced rate of inheritance tax.
Consideration should be given to the type of assets within the estate and the cost of valuing those assets. The executors of an estate can elect to opt out of utilising the lower rate of tax if, for example, the administrative burden of valuing the assets in the estate is too great. In addition if the Will does not include the new relief the beneficiaries can, after the death of the testator, prepare a Deed of Variation and alter the terms of the Will to include a gift of 10% or more of the net estate to charity.
The relief can also apply to jointly owned assets and those where the deceased had an interest in possession. It is possible, for example, for a surviving joint tenant and the executors of an estate to decide to merge those two components of the estate and provided 10% of the combined value is given to charity the reduced rate of inheritance tax can apply to both parts.
What Now?
Whilst we are still waiting for the Finance Bill to receive Royal Assent and so this is not yet in force this update is to highlight the proposed legislation. A new Will can be drafted to take advantage of the new rules. Alternatively it is possible to add a codicil to an existing Will to include provision for a gift of 10% or more to Charity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
