Many charities face serious funding shortfalls now. As part of its ‘Big Society’ initiative, the Coalition Government has introduced a new lower rate of 36% inheritance tax (IHT).
Where a person gifts in their will 10% or more of the net value of his or her estate to charity (after deduction of reliefs and exemptions and the nil rate band) the new lower rate of IHT will apply. This represents a 10% reduction from the usual 40% rate of IHT. For all other estates the rate will remain at 40% and the nil rate band (the IHT-free allowance) will continue to be frozen at £325,000 until April 2015. The new regime will apply to deaths on or after 6 April 2012.
Who will the new 36% rate benefit?
- Charities. It is hoped that the reduced rate will encourage philanthropic gifts by wealthy individuals.
- Testators whose estates are liable to IHT and who had always intended to leave 10% or more of their estates to charity. Testators can effectively increase the amount they are leaving to charity by up to 10%.
- The non-exempt beneficiaries of testators whose estates are liable to IHT, and who planned, in any event, to leave 10% or more of their estates to charity. Charitable legacies will still represent a cost to the other beneficiaries, even after taking into account the lower IHT rate. However, the cost will be shared with HM Revenue & Customs (see below). Where the testator was already planning to leave a significant legacy to charity, the non-exempt beneficiaries will receive a greater inheritance but never the same amount as they would have received had the gift to charity not been made.
Who will not benefit from the new 36% rate?
- HM Revenue & Customs.
- The non-exempt beneficiaries of a testator whose estate is liable to IHT where the testator had not previously planned to leave 10% or more to charity.
Examples of 36% Rate
The following example shows an estate of £1,000,000 where £80,000 is left to charity. It is assumed that a nil rate band of £325,000 is available on the death.
The net estate is:-
Gross estate £1,000,000
Nil rate band £ 325,000
Net estate £ 675,000
10% of the net estate is £67,500, and the charitable legacy of £80,000 exceeds this amount. The 36% rate therefore applies to the estate.
It is important to appreciate that if the nil rate band were not available (because, for instance, of gifts within seven years before death) then the net estate would be £1,000.000 and so the charitable legacy of £80,000 would not exceed 10% of the net estate. The normal 40% rate would therefore apply.
Comparative example of the effect of 36% rate
| No Charitable Gift in Will | Gift to Charity in Will | |
| £ | £ | |
| Estate | 1,000,000 | 1,000,000 |
| Charitable Gift | nil | 100,000 |
| Net Estate | 1,000,000 | 900,000 |
| Less nil Rate Band | 325,000 | 325,000 |
| Taxable Estate | 675,000 | 575,000 |
| IHT @ 40% or 36% | 270,000 | 207,000 |
| Net to Beneficiaries | 730,000 | 593,000 |
| Gain to Charity | nil | 100,000 |
| Loss to HMRC | nil | 63,000 |
| Loss to non-exempt Beneficiaries | nil | 37,000 |
But significantly on a charitable gift of £100,000 without the new 36% rate, the loss to the non-exempt beneficiaries would be £60,000 and not £37,000 and HMRC would receive an extra £63,000 of IHT.
Statistically only around 3% of estates in England & Wales are subject to inheritance tax so whether these changes will significantly increase the amount left to charity remains to be seen.
This is a simplified version of the operation of the new 36% IHT rate and interested testators should consult their solicitor.
Maureen Gilroy-Thomas is a solicitor in Raworths’ probate, wills and trusts unit.. To contact Raworths telephone 01423 566666 or visit our offices at Eton House, 89 Station Parade, Harrogate, HG1 1HF. Alternatively, you can email maureen.gilroy-thomas@raworths.co.uk
