Latest statistics from HMRC show that the number of estates where 10% or more of the net chargeable estate passes to charity is low compared to the number of estates chargeable to inheritance tax.
The reduced rate of inheritance tax at 36% applies where 10% or more of the net chargeable estate is left to charity. This reduced rate has applied since 6 April 2012 and, although the rules are somewhat complex, there is the potential to make tax savings where an individual wishes or is willing to leave part of their estate to charity. Furthermore, saving IHT in this way provides a legitimate means of planning which is worth considering.
HMRC statistics show that of the 16,412 cases which were chargeable to inheritance tax in 2012/13 only 1,558 (about 9.5%) benefited from the reduced rate of 36% (2012/2013 being the first tax year in which the lower rate of 36% was introduced). While this resulted in an inheritance tax saving of £27 million, it is a small fraction compared with the total inheritance tax payable of £3,501 million.
As a brief reminder, let’s assume Frederick has a net chargeable estate of £500,000. Under the terms of his will he leaves his entire estate equally to his two adult nephews. In this case, inheritance tax will be payable on the whole amount at 40%, i.e £500,000 @ 40% = £200,000. His nephews will therefore benefit from £150,000 each.
Had Frederick decided to leave 10% (i.e £50,000) of his net chargeable estate to charity to take advantage of the reduced rate of inheritance tax on his estate, inheritance tax would have been payable at 36% based on £450,000 (i.e £500,000 – £50,000). This amounts to £162,000.
While this means that the estate available to the nephews reduces by £12,000 to £288,000 (£450,000 – £162,000), Frederick’s estate benefits from a significant inheritance tax saving of £38,000.
As can be seen from the above, it is worth remembering that by leaving 10% or more of your net chargeable estate to charity, the estate will suffer a reduced rate of inheritance tax on their subsequent death.