The rules governing the operation of the 10% discount are complicated, but the outline of their effect is as follows. The estate is split into three ‘components’ and the relief is then considered for each component. These components are:
- Property that passes by survivorship rather than by will- this includes anything that is held jointly, such as joint bank accounts and properties held as joint tenants.
- Settled property - assets held on trust where the deceased held a right to the income or the enjoyment of the property for life as an interest in possession.
- The free estate - the assets that can be transferred by the terms of the will, or which devolve by the rules of intestacy if there is no valid will.
The taxable value of each component, and a proportionate share of the IHT nil rate band, is then calculated. This is after subtracting reliefs (but not the exemption for charitable bequests). Provided the charitable legacies made out of the component in question amount to at least 10% of its taxable value, the 36% IHT rate will apply to that component.
The executors may also elect to merge one or more of the components. Provided the total charitable legacies from the combined components amount to at least 10% of the taxable value, the 36% rate can be applied to these combined components. By making full use of the merger facility, it’s therefore possible to secure the lower 36% rate on the entire estate. Even where the charitable legacy comes from just one component, providing the charitable legacies amount to 10% or more of the taxable estate.