Giving to Charity – the 36% Inheritance Tax rate

Many people choose to make a gift to a favoured charity during their lifetime or in their Will and, under current legislation, those gifts are exempt from inheritance tax provided they are made to qualifying charitable bodies (broadly speaking, a ‘qualifying charitable body’ is a charity registered in England and Wales, or any charity registered in the EU, Norway or Iceland that would qualify as a charity in England Wales if it were located here).

During 2012, in an attempt to encourage more people to leave money to charity in their Wills, the government introduced a new tax relief in the form of a 36% reduced rate of inheritance tax (rather than the usual rate of 40%). This rate is relevant to the estates of those who die on or after 6th April 2012 where inheritance tax is payable and, for the reduced rate to apply, the value gifted to charity must amount to at least 10% of the net estate at the date of death. The net estate will, generally speaking, be the value left after deducting any exemptions, the inheritance tax ‘nil rate band’ (which is currently £325,000 and frozen at that level until 2017/18 or up to £650,000 if there is a transferable nil rate band from a former deceased spouse) and any other available reliefs (e.g. Business Property Relief or Agricultural Property Relief).

This article contains practical advice in light of our experience of drafting wills and handling estates where the new rate has been an issue.

Firstly, the application of the 10% test against the net estate is not entirely straightforward because the value and nature of people’s assets change over time, which can make it difficult to calculate a specific sum or percentage of an estate to be left to charity in a Will to ensure that the test is met. The calculation can also become particularly complex in certain circumstances (e.g. where assets are held in trust or jointly with another) and this can make it hard for people to decide whether they should in fact include provisions in their Wills to take advantage of the 36% rate.

Whether you are thinking of making a new Will or you wish to make changes to your current Will to include a charitable gift, it is important to seek expert advice. We can discuss your situation with you and provide you with a bespoke service, tailored to your circumstances, so that your Will is structured to take advantage of the 36% rate.

Secondly, it is worth bearing in mind that if you are a beneficiary of an estate where the deceased died on or after 6th April 2012 and they did not leave a charitable gift or they have left a charitable gift which does not meet the 10% test, then you may wish to consider taking advice from our experts about entering into a ‘Deed of Variation’. This allows beneficiaries to vary their entitlement within two years of death and can be used to retrospectively include a charitable gift or increase the value of a charitable gift in an estate to secure the reduced 36% rate of inheritance tax.

The example below shows how beneficial it can be to charities to increase an existing charitable gift of 4% of the net estate to satisfy the 10% test.  Here, the gross estate is worth £1,000,000 and one ‘nil rate band’ has been deducted, leaving a net taxable estate of £675,000:

Charitable Gift
4% = £27,000
10% = £67,500

Tax has to be paid on
£648,000 @40%
£607,500 @36%

Amount of tax payable is
£259,200
£218,700

Estate balance for distribution
£713,800 to beneficiaries and £27,000 to charity
£713,800 to beneficiaries and £67,500 to charity

As you can see, increasing a charitable gift in this way can lead to a substantial inheritance tax saving benefiting the charity involved. This could also potentially lead to an inheritance tax rebate from HM Revenue and Customs where a Will has been varied within the two-year time limit for Deeds of Variation and inheritance tax has already been paid on the estate.

More information

This is an extract from a longer briefing.  If you would like a copy or have any questions or queries, please get in touch.