Gifts to qualifying charities are exempt from IHT regardless of the value of the gift. The reduced rate of 36% applies where the individual leaves at least 10% of their net estate to charity. In simple terms, the baseline amount is the entire estate in an individual’s name less debts, funeral expenses and certain IHT exemptions – such as the nil rate band, currently £325,000. 

Example:

Louise dies with assets worth £700,000 all in her sole name. Louise’s debts and funeral expenses are £15,000 and as she made no gifts during her lifetime her full nil rate band of £325,000 is available.

In example 1, she leaves £40,000 to charity in her will with the balance passing to her nephew.

	EXAMPLE 1		EXAMPLE 2
Estate	£700,000
Less debts and funeral expenses	£15,000
Less nil rate band	£325,000
Baseline amount	£360,000
Less charity gift	£40,000		£35,000
Estate liable to IHT	£320,000		£325,000
IHT due to HMRC (@ 36%)	£115,200	IHT @ 40%	£130,000
Nephew’s gift	£529,800		£520,000

 

As the gift of £40,000 to charity is more than 10% (the baseline), the IHT rate of 36% will apply to the taxable element of her estate. The £40,000 is not subject to inheritance tax, and therefore will be deducted from the baseline to calculate the total of the estate which is subject to IHT at 36% ie £360,000 - £40,000 = £320,000 x 36% (£115,200). This leaves £529,800 for her nephew.

Had Louise decided to leave a smaller gift to charity of £35,000, (less than 10% of the baseline estate), the IHT liability would be £130,000, taxed at a rate of 40%, leaving £520,000 for her nephew.

Both family and the charity receive less, and the HMRC would benefit.

To find out more about tax efficient legacy giving, contact your professional adviser.