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Charitable Giving

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It’s a difficult climate to be giving money away, but don’t forget there is an Inheritance Tax (IHT) break for those who do when making a Will. Introduced for estates where the deceased passed away after 6th April 2012, the rate of IHT is lower (36% rather than 40%) for estates where 10% or more is given to charity. The 10% is calculated in a surprisingly positive way, and HMRC have guidance on their website for this: http://www.hmrc.gov.uk/inheritancetax/pass-money-property/charity-reduce.htm To illustrate this, I am borrowing an example I read recently. John dies owning:

  • A trading business – or this could be a farm – valued at £5,000,000
  • A half share in a London flat – the total value of which is £500,000
  • Cash and investments worth £1,000,000

In his will he leaves:

  • The business/farm to his son
  • His share in the flat to his wife, who owns the other half share
  • A further lump sum of £500,000 to his wife
  • £25,000 to charity
  • The rest of the estate to his daughter, i.e. the remaining cash / investments

In this example, it looks as if the gift to charity is far too small to qualify for the lower tax rate. But… Firstly, the gift of the business or farm to the son is ignored because it attracts 100% business property or agricultural relief. Secondly, the gifts to the wife are ignored because they attract the surviving spouse exemption. And finally, the nil rate band is deducted from the remaining £500,000 leaving £175,000 (remember, the nil rate is how much of an estate attracts a zero tax rate – currently £325,000). So actually, it took a gift of £25,000 to charity to receive the 36% rate instead of 40%. If you would like to more about making a Will and IHT, please get in touch.

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