As discussed in our February article, gifts made to charity are exempt from Inheritance Tax (IHT), whether they are made during a person’s lifetime or via their Will upon their demise.

This includes gifts to UK Registered Charities and, following the March, 2010 budget, certain charities in the EU, Iceland and Norway.

For individuals leaving money to a qualifying charity on death post 5th April, 2012 an additional relief applies.  Essentially, where 10% or more of a person’s ‘chargeable estate’ is left to charity, IHT is payable at a reduced rate of 36% (as opposed to the usual rate of 40%).

Example

Joan dies on 15th July, 2013 leaving an estate of £875,000.

Joan leaves a legacy in her Will of £75,000 to the North West Air Ambulance.

She leaves the remaining £800,000 to her niece and nephew.

Joan has never been married and has a single Nil Rate Band of £325,000 available.

The IHT bill on her estate is as follows;

Estate                                     £875,000

Less Legacy to Charity          £  75,000

Total:                                       £800,000

Less Nil Rate Band                 £325,000

£475,000

Add Legacy back in                 £  75,000

Chargeable Estate                  £550,000

10% of Chargeable Estate      £  55,000

The legacy of £75,000 exceeds £55,000 and therefore tax is payable on the chargeable estate at the reduced rate of 36%.  The IHT bill is therefore £198,000 (£550,000 x 36%) instead of £220,000 (£550,000 x 40%).

Alternative IHT mitigation strategies:

Giving money to charity is not always a suitable or desirable solution for mitigating IHT and there are many other effective ways of reducing the IHT payable on a person’s estate.

In order to assess your potential liability to IHT and discuss possible solutions please contact Springfield Financial Services Ltd on 01772 729742.