By Duncan Mitchell-Innes
Thanks to a recent government initiative, by leaving 10% of your net estate to charity through your will, you can effectively reduce the inheritance tax bill on your entire estate.
As from the 6th October 2012, it is now the case that if you leave 10% of your estate to charity, inheritance tax will be calculated at 36% instead of the usual 40%.
An interesting point is that if you are currently giving 4% of your net estate to charity in your will, this gift can be increased to 10% without having any impact on the amount that your beneficiaries will receive by your will. The increase in the size of the charitable gift gives effect to the reduced inheritance tax rate.
In practice, let’s assume you leave a chargeable estate, over the nil-rate band, of £1,000,000. If you leave 4% of this to charity and the rest to other beneficiaries, the charity will get £40,000, the other beneficiaries will get £576,000 and HMRC will receive £384,000. If you were then to increase your charitable gift to 10%, the charity will get £100,000, the other beneficiaries will receive £576,000 but HMRC will only get £324,000.
Whilst the rate reduction 40% to 36% might seem ‘small change’ at first glance, on a chargeable estate, over the nil-rate band, of £1,000,000 this does equate to an inheritance tax saving of £40,000. Now is therefore an ideal time to make or update your will to perhaps leave a legacy to help your favourite charity. Not only will you be helping those in need, but you will also help reduce your estate’s inheritance tax liability.
At TWM, we have specialist solicitors who can ensure that your will is professionally drafted to give effect to your wishes and secure the inheritance tax savings. This specialist knowledge is particularly important to ensure that the 10% reduction is obtained.
Whilst the effect of the rules is fairly straightforward, the drafting of them and the ‘small print’ contained in them, is complex. As an example, your ‘estate’ for the purposes of the rules is divided into three separate components. Each of these components can have their own 10% reduction but post-death elections can be made to merge the components. The specific calculations set out to establish whether 10% has been left to charity for the purposes of the legislation are also technical and complex.
At TWM we can assist you right through the estate planning process. We can ensure that your will is constructed in the way you wish and carefully take you through the options available to you. We’d be very happy to meet with you to discuss the ways in which your estate’s inheritance tax liability can be reduced, both with the planning discussed here and with other strategies applicable to your circumstances.