If your estate is worth over the inheritance tax nil rate band (currently £325,000) when you die inheritance tax may be due. As from 6 April 2012, if you leave 10% of your estate to charity the inheritance tax due may be paid at a reduced rate of 36% instead of 40%.
How does the reduced rate work?
Any gifts you make to a ‘qualifying’ charity will be exempt from inheritance tax.
In order to qualify for the reduced rate, you must leave at least 10% of the net value of your estate to a qualifying charity.
The net value of your estate is the sum of all of the assets after deducting any debts, liabilities, reliefs, exemptions and the nil-rate band.
Qualifying charity
A qualifying charity is an organisation that is recognised as a charity for tax purposes by HM Revenue & Customs (HMRC). For inheritance tax purposes a Community Amateur Sports Club (CASC) is also treated as a qualifying charity. This can be checked by asking them to confirm that they have an HMRC charity reference number.
Can a Will be varied after death to achieve this?
If you have not left assets to a qualifying charity or if the donation in your Will does not pass 10% of your estate when you die, the beneficiaries of your estate can enter into a Deed of Variation to make or increase a donation to charity. Doing this may mean that your estate can then qualify to pay inheritance tax at 36% instead of 40%.
Simple example
James died on 25 June 2012 leaving an estate valued at £750,000 after deduction of liabilities.
James left £50,000 to Cancer Research UK, which is a qualifying charity.
Total estate £750,000
Less Cancer Research UK gift £50,000
£700,000
Less Inheritance Tax nil rate band £325,000
Taxable estate £375,000
Plus Cancer Research UK gift £50,000
Baseline amount £425,000
10% of baseline amount £425,000 = £42,500 which means that the estate qualifies for the reduced rate of inheritance tax because the charitable donation of £50,000 is more than 10% of the baseline amount.
Inheritance tax payable would therefore be £135,000 (taxable estate of £375,000 at 36%) compared to £150,000 (taxable estate of £375,000 at 40%) if inheritance tax was paid at the full rate.
Janet Porter is a legal assistant in the private client team in Truro. The team was named Private Client and Family Law Team of the Year at the British Legal Awards 2013. To speak to Janet, please call 01872 265100 or email private.client.truro@stephens-scown.co.uk