Tax break for charitable gifts

Budget announcement

It came as a surprise to everyone when the Chancellor announced in his budget speech that he would be knocking 10% of the Inheritance Tax (IHT) rate for those who leave money to charity in their will. But the initial thought that this might mean a drop from 40% to 30% was soon scotched; the 10% reduction is a percentage of the current rate. This means that where you leave a qualifying proportion of your wealth to charity, the IHT rate on the remainder of your estate will reduce by 10% of the current rate, i.e. from 40% to 36%. But, like all tax breaks, it comes with strings attached.

Qualifying gifts

The new 36% IHT rate will only apply where the person concerned dies on or after April 6 2012. Another condition is that gifts from the estate must be to a charity which is registered with the Charities Commission and you’ll have to give away at least 10% of your net estate.

What does “net estate” mean?

Although the small print and the law itself won’t be drawn up until next year, the Taxman has already set out the basic rules of how the IHT reduction will be calculated. Where the conditions mentioned above are met, the new IHT rate will apply to your estate after knocking off:

• exemptions, e.g. for gifts to your spouse
• reliefs, e.g. for business property
• the nil-rate band (NRB); that’s the amount of your taxable estate, after exemptions and reliefs, on which no IHT is payable. This is currently set at £325,000 until April 6 2015.

Example. John, a widower, dies in July 2012 leaving an estate worth £625,000. He leaves it all to his two daughters except for a charitable gift of £30,000 to the local church. The IHT on his estate would be worked out as follows:

Had John given, say, £29,000 to charity, the rate of IHT would have been the full 40% and the net amount left for his daughters would fall to £487,600. But had John not left anything to charity this would result in there being more in his estate for them despite having to pay the full 40% IHT rate.

Tip. Where you don’t intend to leave money to charity, doing so can never make your beneficiaries better off, even with the new IHT break. But we’ve calculated that where your original intention is to leave over 4% of your net estate to charity it will be worth increasing this to 10% as the IHT saving will mean there will be more left for your other beneficiaries.

How much should I leave?

The trouble is that calculating the net value of an estate is tricky and can’t be done accurately until after death. This might mean you come up short with a charitable gift and lose the IHT break. The solution is to include a formula in your will that says the level of the gift will be 10% of your estate after the taking of all exemptions, reliefs and the NRB. To make sure the formula is worded correctly, we recommend using a solicitor to draft your will.