Inheritance tax relief on gifts to charity

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20 July 2011

In his Budget 2011 the Chancellor announced that he would be introducing a new Inheritance Tax relief to encourage gifts to charity. A Consultation Document was published on 10 June 2011, inviting comments by 31 August 2011. Subject to these comments, the new measures are to take effect from April 2012.

The proposal is to reduce from 40% to 36% the rate of IHT payable on estates under which 10% is given to charity. How that 10% is to be calculated is not yet entirely clear, but it is to be 10% of your taxable estate. For example, if your estate is £825,000 and you have not made any lifetime gifts, your taxable estate will be £500,000 after deducting the IHT "nil rate band". Furthermore, that estate will only be taxable if it is left to someone other than your spouse.

Suppose, in this example, that your Will leaves £50,000 to charity and everything else to your children. The 10% hurdle will be met. The £50,000 will be tax free in any event, as a gift to charity. The difference comes in the tax payable on the taxable balance of £450,000 left to the family, which is set to fall from 40% to 36%, thereby saving £18,000 in tax.

If you had no intention of benefitting charity, this measure might not persuade you to change your Will. If everything were left to your children, they would receive £625,000 net of tax. By giving £50,000 to charity, you would reduce the amount for your children to £613,000 ( the figure would be £595,000 under the existing law)  On the other hand, a net cost to the family of £12,000 is quite modest in order to secure £50,000 for charity.

Where the new law will have most impact is where you always intended to give some money to charity, but not as much as 10% of your taxable estate. By increasing the charitable gift up to 10%, you may boost the gift to charity without cost to your family. This will be the outcome if you are already planning to give away 4% of your taxable estate. If you compare the effect for your family of giving to charity 4% of your estate under the existing law, with 10% under the new law, you will find that your family receive exactly the same.

As the end of this financial year approaches, we should know the outcome of the consultation process, so that we can then advise how most simply to amend your Will, to secure the best outcome. At this stage the most flexible option is to create a discretionary trust in your Will, for the benefit of charity and your family, with instructions to your executors how they should exercise their discretion. If, within two years of your death, they give to charity a figure which matches the 10% required in the new legislation, that will secure the new relief, for the benefit of both charity and family. Such a Will should be backed up by a clear letter of wishes explaining the intention. Come next year, when the new law is published, it may then be possible to achieve the same result in another way but, if you wish to change your Will now, the discretionary trust is the best option.

Charities who are seeking to attract legacies should be alerting donors to the new rules now, in the hope of boosting philanthropy, as is the intention, whilst also benefitting the families of donors.

For more information, please contact Charles Wyld on +44 (0)117 902 2773 or email charles.wyld@burges-salmon.com

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