According to HM Revenue & Customs, Inheritance Tax (IHT) relief on charitable legacies increased from GBP 760 million to GBP 880 million in the 2015/2016 tax year. The total relief has almost doubled since April 2012, when it became possible to reduce the chargeable rate of IHT on your estate provided you leave 10% of your estate to charity.
Generally, a gift included in a Will to a charity is exempt from IHT so there have always been IHT savings where a testator chooses to benefit charities. Originally the charity had to be in the UK but the scope of the charity exemption was widened in 2010. Charities in EU member states, as well as Norway and Iceland, now fall within the scheme.
The new rules mean that gifts to charities in a Will could provide an IHT saving in respect of that part of the estate not passing to charity. If 10% of the net estate (this being the estate that will be chargeable to IHT, so after the deduction of the Nil Rate Band and any other reliefs) is left to charity, the IHT rate that applies to that chargeable estate will be reduced from 40% to 36%.
Although only a 4% saving in IHT, testators may wish to consider trying to fall within the provisions if they were already considering gifts to charities and the amounts were in a similar range. A testator may take the view that it is worth increasing the charitable legacies sufficiently so that the estate can benefit from the reduced rate of IHT. If a testator has this in mind then it is possible to include particular wording in their Will to allow for the gift of the exact amount required to meet the reduced rate to be left to a charity or a number of charities.
All, however, is not lost if the testator chooses to include fixed legacies to charities and by the time of their death these legacies fall short of the 10% required. In these circumstances, it is possible for the beneficiaries of the estate to enter into a Deed of Variation within two years of the date of death. This will increase the amount passing to charity and thereby benefit from the reduced rate of IHT. This has the obvious benefit of providing a larger amount to charity but, depending on the numbers, it can also have the effect of increasing the amount passing to the beneficiaries because there is less IHT to pay.
With charities very much in need of support, it is good news that the tax incentive is encouraging more charitable giving. It is also another reason why it is important to seek specialised Will drafting and estate administration advice to ensure full advantage can be taken of the relief.
For further information, please contact Alice Clewes, Partner at Hay & Kilner
Call: 0191 232 8345