What you need to know about IHT and charitable giving

AXA Wealth’s Brian Murphy looks at the implications of the recent HMRC consultation on inheritance tax for people who leave a charitable legacy in their will.

On 10 June 2011, HMRC published a consultation document – A new incentive for charitable legacies – which set out suggestions regarding the policy detail and implementation of a lower rate of inheritance tax where people leave a charitable legacy of 10% or more of their estate when they die. The stated aim of the policy is to encourage charitable giving and to build a more socially conscious society.

The new legislation will be relevant for deaths occurring on or after 6 April 2012. Estates that include charitable legacies of at least 10% of the net estate will benefit from a 36% rate of IHT compared with the main IHT rate of 40%.

Meeting the threshold

Whether or not the 10% threshold has been met will be determined by comparing the total value of charitable legacies for IHT purposes and the value of the net estate for IHT purposes as reduced by:

• Any available nil-rate band;
• The value of assets passing to a surviving spouse or civil partner;
• Other IHT reliefs and exemptions – apart from the charitable legacy itself.

If this 10% test is passed, the estate will qualify for the reduced rate of IHT, but this may be better demonstrated through the following example.

An estate is valued at £850,000 and the available nil-rate band is £325,000. The minimum charitable legacy to pass the 10% test would be calculated as explained in the table opposite.

Consulting your intelligence

This example features a straightforward situation. However, in practice there will be many more complex areas and the consultation paper asks for views on aspects of the policy that have not yet been decided and how HMRC can best implement the policy.

One such area would be where someone dies with an estate comprising more property than they are able to distribute under the terms of their will. This will happen where:

• The deceased owned joint property which passed automatically to the survivor on death;
• The deceased had made an earlier gift with reservation of benefit;
• The deceased had a qualifying interest in possession in trust property.

In situations like any of these, the consultation document asks whether the baseline for the reduced rate should be limited to the free estate or extended to other components of the estate. If extended to cover the entire estate, the amount which would need to be left to charity to get the 10% reduction would be a much greater percentage of the free estate. If only the free estate were used, the available nil rate band would need to be apportioned between the free estate and the total estate which would lead to greater complication.

Other areas covered by the consultation document include:

• The nature of the legacy including some practical issues around the valuation of assets, types of charitable legacies, claims and avoidance;
• How to deal with deeds of variation, including notifying charities about legacies;
• Administration issues such as those connected with forms, guidance and wills.

The consultation period runs until 31 August 2011 and the full Consultation document is available on the HMRC website.

Is it worth it?

As stated above, the idea behind the new policy is to encourage charitable giving. By HMRC’s own figures, contained within the document, after applying the IHT threshold and the various exemptions and reliefs, most estates are not liable to IHT. In 2010-2011 it is projected that of 552,000 deaths, only 3% (or 16,000) of estates will pay IHT, so this is aimed at a small percentage of the population.
In determining whether or not this will be worthwhile, it is necessary to consider the complications and cost of the relief against its benefit.