Lower inheritance tax for charitable donors
Lower inheritance tax for charitable donors
Consultation on a document entitled 'a new incentive for charitable legacies' closed at the end of August.
The subject of the consultation is a proposed lower rate of inheritance tax (IHT) on estates that leave at least 10% to charity. The proposal was first outlined in the Chancellor's Budget speech in March as part of the coalition's 'Big Society' initiative. Under the proposed guidelines, the rate of IHT would be reduced from 40% to 36% for estates that include charitable legacies of 10% or more of the 'net estate', for deaths occurring on or after 6 April 2012.
As a consequence, beneficiaries of these estates would inevitably lose some of their inheritance. Inheritance tax is only paid on estates valued at more than £325,000. Currently, therefore, an estate of £1m would see the beneficiaries receive £730,000 and the taxman £270,000. Under the new regime, if 10% of that estate above the £325,000 threshold is given to charity, the beneficiaries would only receive £713,800 and the taxman £218,700, leaving £67,500 to the charity.
Where a charitable legacy is nearly 10% of the net estate, a small difference to the amount gifted to charity could have a much larger impact on the estate's IHT liability. Despite this potential 'cliff edge' effect, the government has, so far, announced no plans to apply tapering or any other mechanism to mitigate it. It is, therefore, crucial to plan the value of any charitable legacies carefully in order to avoid forgoing this relief.
One option is to draw up a deed of variation, which can be implemented to increase the amount left to charity if it falls short of the 10% net value required, provided the beneficiaries agree to the variation. The deed of variation can then be used to ensure that the reduced rate of IHT applies, which would be particularly useful where the charitable legacy is just below the 10% threshold.
For more information about how you and your estate could be affected by these changes, please contact us.
Submitted by MSB Accounting on Tuesday 6th September 2011