Reducing an Inheritance Tax – it’s good to give
A new rule began on 6 April 2012 that reduces the amount of Inheritance Tax due on an estate if at least 10% of the taxable amount is given to a charity – but not to one of the other exempt bodies, unless of course it is also a charity.
An estate can pay Inheritance Tax at a reduced rate of 36% on some assets (instead of 40%) if 10% or more of the ‘net value’ of their estate is left to charity.
If you planned to give some money to charity already but too little to obtain the 36% rate, and then you raise that to the amount or a little more than is needed to obtain the 36% rate, you may find that your heirs will get more money from your estate.
The net value of an estate is the total value of all the
assets after deducting:
• Debts and liabilities
• Exemptions, for example, anything left to a husband, wife or registered civil partner
• Anything below the Inheritance Tax threshold of £325,000 (known as the ‘nil rate band’)
An estate doesn’t have to pay Inheritance Tax on any gifts given to charities, museums, universities or community amateur sports clubs.
Which charities you can leave assets to
To pay the reduced rate, the assets must be left to:
• Charities with an HM Revenue and Customs (HMRC) charity reference number
• Community amateur sports clubs (CASCs)
Writing a will
You can write a clause into your will to make sure that you’ll leave 10% of your estate to charity.
Change a will
The beneficiaries of an estate can change the will to make or increase a donation to a charity so the estate
meets the 10% test.
Opt out of paying the reduced rate
If you’re the executor of a will or administrator of an estate, you can choose to pay Inheritance Tax at 40% rather than the reduced rate – if the beneficiaries agree.
This can make it easier to deal with the estate, for example, if the cost of getting some of the assets professionally valued would outweigh the benefits of paying the reduced rate.