From 6 April 2012, a reduced rate of inheritance tax at 36% was introduced when 10% or more of the net chargeable estate is left to charity.

 

This means potential to make inheritance tax savings when an individual leaves part of their estate to charity.

 

HMRC have recently released statistics showing how the number of estates partly left to charity is low compared to the number of estates chargeable to inheritance tax. Of the 16,412 cases which were chargeable to inheritance tax in 2012/13 (the first tax year in which the lower rate was introduced) only 1,558, about 9.5%, benefited from the reduced tax rate. While this resulted in an inheritance tax saving of £27 million, it is a small fraction compared with the total inheritance tax payable of £3,501 million.

 

As an example;

  • Let’s assume Frederick has a net chargeable estate of £500,000. Under the terms of his will he leaves his entire estate equally to his two adult nephews. In this case, inheritance tax will be payable on the whole amount at 40%, i.e £500,000 @ 40% = £200,000. His nephews will therefore benefit from £150,000 each.
  • Had Frederick decided to leave 10% (i.e £50,000) of his net chargeable estate to charity to take advantage of the reduced rate of inheritance tax on his estate, inheritance tax would have been payable at 36% based on £450,000 (i.e £500,000 – £50,000). This amounts to £162,000.
  • While this means that the estate available to the nephews reduces by £12,000 to £288,000 (£450,000 – £162,000), Frederick’s estate benefits from a significant inheritance tax saving of £38,000.

As can be seen from the example above, leaving 10% or more of an estate to charity will achieve a reduced rate of inheritance tax for those that it is passed on to.

Send to a friend: