Inheritance Tax Series – Reduced Rate of IHT & Gifts to Charity

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.
 
Reduced Rate of Inheritance Tax – Charitable Donations
 
Gifts to registered charities, whether in lifetime or on death, are as a general rule exempt from inheritance tax.
 
In addition, with effect from 6 April 2012 where a person gives 10% of their ‘net estate’ to charity, the estate may benefit from a reduced rate of inheritance tax of 36%.
 
There are specific rules to determine the amount of the net estate for these purposes. Furthermore, assets can be owned in different ways (for example; joint ownership, tenants in common and trusts), and the 10% test must be applied to the different ownership types when considering whether the relief is due.
 
In cases where the 10% test is not currently met it should be possible to either (1) amend the Will during lifetime to increase the amount of charitable gifts, or (2) where the taxpayer is already deceased the personal representatives could enter into a deed of variation within two years of death.
 
In certain circumstances, it may be possible to achieve an overall tax saving by increasing the amount of the charitable gift.
 
However, in the majority of cases this is unlikely to be the case because the benefit of the lower tax rate will be offset by the increased cost of increasing the amount of the donation.