The Chancellor introduced an alteration to the Inheritance Tax rules in yesterday's Budget. This will possibly help chairities with perhaps slightly larger gifts.
Example 1
Let us suppose that an estate is worth £800,000 and that the couple have died without using any other forms of tax planning. Prior to the budget the tax levied would be 40% of the balance above the nil rate band (with a couple, this is effectively doubled from £325,000 to £650,000) so 40% of the remaining £150,000. An IHT payment of £60,000 to HMRC. The balance of £740,000 would be paid to the beneficiaries of the Will.
The Budget states that if 10% of an estate is gifted then the tax liability would also reduce by 10% from 40% to 36%.
Returning to our example, an £800,000 estate, gifted £80,000 leaves a £720,000 estate (£80,000 to charity). Using both nil rate bands (£650,000) the taxable estate is £70,000 which would not be taxed at 40% resulting in a payment of £28,000 but 36% resulting in an IHT payment of £25,200. The beneficiaries of the Will inherit £694,800.
The only change in the rule is the reduction to the IHT tax from 40% to 36% as any gift to charity from an estate is paid tax-free to the charity and falls outside the estate for tax calculations.
Please note that the nil rate band of £325,000 per person is frozen until April 2015. However after this date CPI (Consumer Price Index) will be applied to the allowance.
Example 2
By way of another example, say a larger estate worth £10m and assuming that no other tax planning has been performed. Before the budget, the tax liability would have been £3.74m with the remaining £6.26m passing to beneficiaries of the Will. In the new Budget a gift of £1m must be made to charity leaving an estate of £9m. If this sum had been given before the Budget the resulting tax payment would be £3.34m following the Budget it is reduced to £3.006m a saving of £334,000. The beneficiaries inherit £5.334m.
I'm not sure how much headline this small change will create. In practice, it would be difficult to be specific about specific amounts of money given to charity as the estate would need to be valued at the date of death, so using the first example, if you had decided to leave your favourite charity £80,000 this may not actually be 10% of the estate. The value will fluctuate on a daily basis. So in order to take advantage of the new legislation you would actually need to amend your Will to make a provision to gift 10% of the net value of the estate to charity. This is perfectly possible to do, but of course may not take account of your family circumstances at the time. Only 1 in 7 people have a valid Will which in of course suggests that few people really plan ahead. So whilst, this is good news potentially for Charities, in practice unless you amend your Will few will see the benefit, unless you have already made a provision to give a sum that is probably substantially more than 10% of your estate. So if this is something that you wish to do (and remember IHT legislation does alter) you need to pay a visit to your Solicitor to review your Will. There is a guide to making a Will within the resources section of my website.
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