IHT: Fund a charitable bequest by looking offshore

With the government proposing an IHT break for individuals making charitable donations in their will, Prudential’s Gerry Brown explains why you should consider an offshore structure

It has been estimated that as much as 74% of the population give to charities during their lifetime, while only 7% make charitable bequests through the medium of wills.

For deaths on or after 6 April 2012, it is proposed that estates providing charitable bequests of at least 10% of the net estate will benefit from a 36% rate of IHT (compared with the main IHT rate of 40%).

The 10% test

Whether or not the 10% threshold has been met (‘the 10% test’) will be determined by comparing:

(a) the total value of charitable legacies for IHT purposes; and
(b) the value of the net estate for IHT purposes as reduced by:

(i) any available nil-rate band;
(ii) the value of assets passing to a surviving spouse or civil partner; and
(iii) other IHT reliefs and exemptions (e.g. business or agricultural property relief) - apart from the charitable legacy itself.

If the 10% test is passed, the estate will qualify for the reduced rate of IHT.

Case study

Kevin is a 59-year old widower. His wife, Nina, died from cancer some years ago. He has resolved to get his financial affairs in order and speaks to his adviser about tax-efficient gifting.

Kevin took early retirement following Nina’s death. He has an occupational pension and income from writing book reviews. His annual income is approximately £20,000. He supplements this with occasional withdrawals from a life assurance bond.

Kevin lives in a house worth about £800,000. His estate for inheritance tax purposes (including house contents and the bond) is £1.1m.

Kevin is aware of the potential impact of IHT on his family but in view of concerns over future care costs he does not want to make substantial gifts during his lifetime.

Kevin has “inherited” a full inheritance tax nil rate band from Nina.

His adviser draws up the following IHT calculation as a starting point.

Kevin wishes to make some bequests to cancer research charities with the rest of his estate passing to his children. He had thought that charitable gifts of the order of £70,000 might be appropriate.

His adviser points out the inheritance tax advantages of charitable legacies from 6 April 2012 and draws up the following revised calculation:

A charitable gift of £70,000 has “cost” the family £26,800 as the tax charge has fallen from £180,000 to £136,800 – a drop of £43,200. In other words, the government has contributed £43,200 to the charitable legacy and the family £26,800