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Charitable donations and inheritance tax ‐ more guidance

It is now possible to reduce the Inheritance Tax (IHT) payable on your estate by 10% if you leave 10% of your assets to charity.

This cuts the rate from the standard 40% to 36%.

The new system came into effect on 6th April but many people are still unclear how it works and how they can make best use of it. With this mind, HM Revenue and Customs have released a guidance document.

The guidance makes it clear that any gifts you make to a qualifying charity are exempt from IHT. This applies whether the gift was made during your lifetime or in your will.

However to qualify, you must leave at least 10% of the net value of your estate to a qualifying charity. The net value is the sum left after deducting any debts, liabilities, reliefs, exemptions and the nil-rate band.

That sounds quite straightforward but, as HMRC points out, there are "different ways you can own assets such as money, land or buildings". The way that you own the assets and with who you own them "affects the way they're treated when deciding whether the reduced rate of tax can apply".

The HMRC statement says: "To see how much you need to leave to charity to qualify or whether your estate can pay a reduced rate of Inheritance Tax because of a charitable donation left in a will, you have to work out the value of each of the separate parts of an estate. These are known as 'components'. It's possible that one part of your estate may pay Inheritance Tax at 36% and another pay tax at the full rate of 40%.

"To work out whether the reduced rate applies, your estate and your assets are broken down into three components as follows:

  • assets that you own jointly with someone else that pass by 'survivorship'
  • assets in trust
  • assets that you own outright or as tenants in common with someone else

"It's also possible to merge one or more components to gain the maximum benefit from the reduced rate."

At this point, the process becomes more complicated and it would be wise to seek expert advice to ensure you make the most of the benefits available.

HMRC also points out that if you don't leave a donation to a qualifying charity, or your donation doesn't pass the 10% test, your beneficiaries can arrange an 'Instrument of Variation' to make or increase a donation to charity. By doing so, it could mean that your estate could then qualify to pay IHT at 36% instead of 40%.

Please contact us if you would like more information about the issues raised in this article or any aspect of inheritance tax planning.

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