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In his 2011 Budget, the Chancellor announced a package of measures to support philanthropy and encourage charitable giving by donors at all life stages.  Here we examine the provisions for a reduced rate of inheritance tax for estates leaving 10% or more to charity.  

After extensive consultation with professional bodies, the terms of the Finance Bill 2012 have now been published setting out the proposed legislation which provides for a reduction in the rate of inheritance tax from 40% to 36% where 10% or more of a deceased person’s net estate is left to charity. This measure will apply to deaths on or after 6th April 2012.  

On death, inheritance tax is charged where the net value is more than the inheritance tax threshold (currently £325,000).

A person’s estate for inheritance tax purposes includes not only the assets that they directly owned immediately before their death and which they can dispose of under the terms of their Will (known as their “free estate”) but also certain other assets and property such as 

• Jointly owned assets which pass automatically to the surviving joint owner
• Interests in certain types of trust
• Assets which the individual gave away during their lifetime but continue to enjoy (gifts with reservation of benefit)

All these different categories of asset combine to form an aggregate estate which is subject to inheritance tax. 

This total estate is reduced by reliefs and exemptions such as exemption for assets passing to a spouse or civil partner and business property relief applying to certain trading assets. Gifts made to qualifying charities are exempt from inheritance tax. 

The effect of implementation of the Finance Bill will be that, for deaths on or after 6th April 2012, inheritance tax will be charged on the net chargeable value of an estate at a rate of 36% where 10% or more of the estate has been left to charity.  The 10% threshold will be applied to each category of asset (free estate, jointly owned assets and trust property) separately. The calculation is not necessarily straightforward!

The main beneficiary of the proposals will be the charities which hope to receive greater levels of legacies.  However, where individuals are already planning to leave legacies to charity of 4% or more of their taxable estate, it will be beneficial to increase this to 10% of the taxable estate because the amount distributable to beneficiaries will not reduce and may increase. So, the individual can leave more to charity without reducing the amount available to the beneficiaries. 

Clare Jeffries
Partner

This guide is for general information and interest only and should not be reidl upon as providing specific legal advice.