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Last updated: 28 Jun 2022
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Have you considered a charitable bequest to reduce Inheritance Tax?

Making a charitable bequest can be a beneficial way of reducing the amount of Inheritance Tax (IHT) you pay on your estate after death. Here’s how making charitable bequests can lead you to benefit from IHT exemptions or lower IHT rates.
What can be done to mitigate your Inheritance Tax liability?

What can be done to mitigate your Inheritance Tax liability?

IHT is payable on a deceased person’s estate usually at the rate of 40% on the value of the estate above the nil rate band of £325,000. By leaving at least 10% of your taxable estate to charity, your estate may obtain a discount on the rate of IHT applicable to the chargeable portion of the estate. This means the IHT rate on the chargeable estate reduces from 40% to 36%.

Importantly, bequests to charities are in general exempt from IHT regardless of whether the 10% condition is met.

The rules determining qualification for the discount are complicated, but an 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: 

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. 

Property that passes by survivorship rather than by will - this includes anything that is held jointly, such as joint bank accounts and land held as joint tenants.

Settled property - assets held on trust where the deceased had a right to the income or the enjoyment of the property for life.

The taxable value of each component known as the ‘baseline figure’, is then calculated. The baseline figure is the gross value of the component, after subtracting liabilities, exemptions and reliefs (but not the exemption for charitable bequests) and a proportionate share of the IHT nil rate band. 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 baseline figure, the 36% rate can be applied to these combined components. By making optimal use of the merger facility, it may be possible to secure the lower 36% rate on the entire estate. 

About the author

Louise Day

020 7556 1362
dayl@buzzacott.co.uk
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What can be done to mitigate your Inheritance Tax liability?

IHT is payable on a deceased person’s estate usually at the rate of 40% on the value of the estate above the nil rate band of £325,000. By leaving at least 10% of your taxable estate to charity, your estate may obtain a discount on the rate of IHT applicable to the chargeable portion of the estate. This means the IHT rate on the chargeable estate reduces from 40% to 36%.

Importantly, bequests to charities are in general exempt from IHT regardless of whether the 10% condition is met.

The rules determining qualification for the discount are complicated, but an 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: 

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. 

Property that passes by survivorship rather than by will - this includes anything that is held jointly, such as joint bank accounts and land held as joint tenants.

Settled property - assets held on trust where the deceased had a right to the income or the enjoyment of the property for life.

The taxable value of each component known as the ‘baseline figure’, is then calculated. The baseline figure is the gross value of the component, after subtracting liabilities, exemptions and reliefs (but not the exemption for charitable bequests) and a proportionate share of the IHT nil rate band. 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 baseline figure, the 36% rate can be applied to these combined components. By making optimal use of the merger facility, it may be possible to secure the lower 36% rate on the entire estate. 

What to look out for

What to look out for

To ascertain how much must be left to charity on death to be able utilise the reduced rate, its important to have an idea of the value of the components that will make up your estate. IHT planning will also allow you to assess potential savings of such a bequest. As experts in IHT and estate planning, we can assist with both elements.

What if less than 10% is left to charity?

What if less than 10% is left to charity?

It may transpire that a charitable legacy, particularly if drafted as a fixed sum, falls just short of the 10% threshold. It’s possible to pre-empt such a result by careful drafting, in particular, by including a discretionary trust in the will with a supporting letter of wishes, giving the executors the power to redirect the necessary percentage of the estate’s funds to charity.   

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