Financial focus on paying 36% IHT
Whilst most people know that the headline rate of Inheritance Tax (IHT) is 40%, fewer people are aware of the reduced rate of 36% applicable where 10% or more of a deceased’s net estate is left to charity.
The “Net Estate” calculation is complicated as this is after deductions for any IHT exemptions and you can also choose to include some components but not others when calculating the IHT due.
For most Estates, whether the charitable donations are sufficient to trigger the 36% rate is a matter of fact. For those on the cusp of achieving the 10% level of charitable giving, there is a band where the IHT saving exceeds the increase in charitable gifts required to trigger it. This can result in an increase in charitable giving AND an increase to the beneficiaries at the same time.
For example – Joe’s estate amounts to £600,000, is only entitled to the nil rate band exemption of £325,000 and left £27,000 to charity (less than 10% of his “Net Estate”). This generates an IHT liability of £99,200 at 40% and a distributable estate of £473,800 (£600,000 – £27,000 – £99,200). However, had Joe left £30,000 to charity (over 10% of his Net Estate), the 36% rate applies reducing the IHT to £88,200 and his beneficiaries inherit £481,800. Here the executors would look to execute a Deed of Variation to gift a further £3,000 to charity and obtain a further £8,000 for the beneficiaries.
The actual 40%/36% tipping point (and therefore the point where both the charities and the beneficiaries benefit) will be different for each Estate. For some Estates, the increase in donations will exceed any benefit for the beneficiaries. In others, the 36% band will have already been met. But for those just short of the 10% donation threshold, being more generous could benefit both charity and beneficiary – just not HMRC.
A good solicitor will be able to include a phrase into your Will to allow your charitable donation to be varied depending on the Estate values and reliefs ultimately involved. For deaths that have already occurred, executors can consider a Deed of Variation.