Changes to Inheritance Tax Rules Encourage Charitable Giving

In 2012 new Inheritance Tax rules were introduced to encourage charitable giving in Wills.  The new rules reduce the rate at which Inheritance Tax is payable where at least 10% of an estate is left to a registered charity.

Inheritance Tax is only payable on estates worth in excess of £325,000 (the current nil rate band), but any amount over that figure is usually taxed at 40%.  Whereas Inheritance Tax (IHT) was once considered the burden of only the very wealthy, the steady rise in property prices in the UK now means that an increasing number of individuals are reviewing their wills and considering different methods of reducing the IHT liability on their estates.

Whilst there are a number of ways your IHT liability can be reduced, charitable giving is becoming increasingly popular as legacies to a registered charity are not subject to IHT.  However, it is now possible to reduce the IHT rate chargeable on your entire taxable estate to 36% provided at least 10% of your net estate is donated to a registered charity.  Whilst this will mean that your non-charitable beneficiaries will receive a slightly reduced legacy, it could greatly benefit a charity close to your heart and considerably reduce your overall IHT liability.

Ignoring any other reliefs and exemptions that may apply, the benefits of such charitable giving are demonstrated by the illustrations below:

For example, say your estate is worth £500,000 at the point of death, you have two children and you intend to leave your estate equally between them when you die. You are neither married or in a civil partnership and so the spouse exemption is not available to you.  The current Nil Rate Band (NRB) is £325,000, therefore your net estate on which IHT is chargeable is £175,000 (£500,000 less £325,000).

If you make a Will leaving your entire estate to your children only:

In your will you leave your entire estate to be divided equally between your only two children.

The IHT payable on your estate is 40% of the net value (£175,000) which totals £70,000. Your children will receive a total of £430,000 and HMRC will receive £70,000.

If you make a Will leaving 10% of your estate to a registered charity:

If you decide to leave at least 10% of your net estate to charity the IHT liability would be reduced as follows:

After deducting the NRB from the estate, you leave a gift of £17,500 to a charity of your choice (this is 10% of the net value of £175,000, i.e. after the NRB has been deducted).  This leaves £157,500 upon which the reduced tax rate of 36% is payable, giving a total tax liability of £56,700.

This leaves £425,800 to be divided equally between your two children. So whilst your children’s inheritance is reduced by £4,200 in aggregate, your IHT liability is reduced by £13,300 and you have benefited your charity to the amount of £17,000.

If you believe your estate may be liable to IHT it is important to have a will drawn up and reviewed regularly to ensure you are making best use of the IHT rules.

For further information please contact Kirsty Bolam on 0191 261 0096 or by email at who would be happy to advise you on charitable giving and other methods of reducing your IHT liability.