Charities Relief: Maximising the Post-tax Estate on Death

There have been several posts on LinkedIn over recent months about the Finance Act 2012
rule reducing from 40% to 36% the rate of Inheritance Tax (IHT) where at least 10% of the
estate is left to charity. What is easily forgotten is that this is the ‘net estate’, that is after
deducting the nil-rate band.

If you are charitably minded, have you given thought to how you can use the various
exemptions and reliefs from IHT and Income Tax, for the benefit both of your chosen
charities and of your family – even if HMRC might lose out?

Imagine a widow, Kate, who dies with an estate of £1,000,000, of which she leaves £50,000
to a particular charity and residue to her two children. She has her own £325,000 nil-rate
band intact, along with the £175,000 residence nil-rate band, but none inherited from her late
husband. Deducting the total nil-rate band from her estate together with the charitable legacy
produces £450,000, on which IHT at 40% is £180,000.

Adding the charitable gift of £50,000 to the net estate makes £550,000, of which 10% is
£55,000, so the case doesn’t qualify for FA 2012 relief and the £180,000 IHT bill remains.

However, if the two children were happy to forgo £10,000 of their inheritance between them
and to vary the Will so that the charitable gift becomes £60,000, the total of the net estate and
the charitable gift is £560,000, of which £60,000 is 10%. Accordingly, IHT on the reduced
£440,000 is charged at 36% to produce a tax bill of £158,400.

So, while HMRC loses out to the tune of £21,600, the charity gets another £10,000 and the
two children receive between them an extra £11,600 (the saving in IHT less the increased
charitable gift).

Moreover, under Gift Aid, assuming that each of the donors qualifies in the tax year as
having paid Income Tax or Capital Gains Tax at least equal to the Gift Aid Relief on all
charitable gifts, the charity receives a further £2,500 and the children the potential of

Additional Rate Relief of 25% of £12,500, viz £1,562.50 each (both paying Income Tax at a
marginal rate of 45%).

And then you see how the whole thing can be made even so much better, apart from HMRC’s
point of view. Suppose the whole charitable gift of £60,000 was not left in the Will, but
made by Deed of Variation under Inheritance Tax Act 1984, section 142, then not only is the
same IHT result obtained, but also the charity gets £15,000 under Gift Aid on top of the
£60,000 gift and the children’s total Additional Rate Income Tax Relief is increased
accordingly (to 25% of £75,000 or £9,375 each).

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