With effect from 6 April 2012, there has been a reduced rate of inheritance tax (IHT) of 36% chargeable on death, provided that at least 10% of the net estate has been left to a qualifying charity.
The reason that everyone wins is that it is possible to increase an existing small charitable legacy to 10% such that the resulting reduction in the IHT rate from 40% to 36% means the other beneficiaries actually end up with a greater legacy. The tipping point for a win-win situation is where the current charitable donations are around 4%.
There are, inevitably, complications involved in working out if an estate will qualify for the reduced rate of IHT. In particular, each component of an estate is looked at separately to see if the IHT on that component can be reduced. The three components are as follows:
- assets held jointly that pass by survivorship
- assets held in trust that are treated as taxable on death
- other assets.
Where a sufficient charitable legacy has not been included in the will it may be possible to execute a deed of variation within two years of the death and increase the amount left to charity. To benefit from the IHT reduced rate, the recipient charity must be based in the UK, EU or some specified countries. Gifts to a community amateur sports club will also qualify for those wanting to encourage future Olympic competitors.
In some cases it may be worth foregoing making lifetime charitable gifts out of income under gift aid and instead making larger charitable donations on death. Every scenario will be different and individuals and executors will need to take specific advice.
In addition to these new rules there are several other straightforward ways of reducing the burden of IHT, including various exemptions for lifetime gifts and utilising the reliefs available for both agricultural and business property.
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.
