Largesse by Will just got larger

13 February, 2014

The much discussed 10% of your estate to charity, 10% less inheritance tax is now law.  And while unquestionably generous, like so much tax law, it is not quite as generous (or simple) as it might at first appear.

The gift to charity must be no less than 10% of your taxable estate – the value of all your assets, less debts, liabilities, inheritance tax reliefs and exemptions.   If it is, then the rate of inheritance tax on the rest drops from the usual 40% to 36% – a reduction of 10%.

At first blush it looks rather as though you are simply paying to charity a slug of what you would otherwise pay in inheritance tax.  But an example will show that is not quite right.

Phil Anthropist dies worth £1m.  Knowing about the 10% rule he makes a will leaving £100,000 to his favourite charity We Could All Care More.   And everything else to his children.

The inheritance tax on his estate will be as follows

Net estate: £1,000,000

Less nil rate band: 325,000

Net taxable estate: 675,000

The gift is in fact nearly 15% of his taxable estate and so he easily qualifies for the 36% rate.

The inheritance tax when allowing for the legacy itself will be £207,000 so what goes to his children is his estate less tax and less the legacy – £693,000.

His sister Ida Rutherthkids-Gottet chose to leave all her £1m estate to her children and so didn’t qualify for the 36% rate.  But because she was giving nothing to charity what was left for the children was £730,000 – rather more.

So what went wrong?  First because it is 10% of the taxable estate Phil could have left just £67,500.  Then the inheritance tax on the rest of his estate would have been £218,700 and the net estate left to the children £713,800.  More than before, but still less than Ida.

What all this shows is that it is not simply a question of leaving to charity what you would otherwise pay to the Revenue.  No – to get that you must have been leaving something to charity anyway –and it works out at 4% of your taxable estate.

What it does mean though is that if you are giving that 4% to charity you could give more than twice as much without denying your other beneficiaries a penny.

What if you are proposing to give more than 10% anyway?  Well then, your non-charity beneficiaries get the advantage.  The reduced inheritance tax rate is applied to their share.  And if you feel that the charity is more deserving of that extra, you can increase still further the charitable bequest.

When you start to try and work out how much you need to give to charity to qualify and maximise the benefit of the relief, you realise that much is going to depend on the size of your estate, how much nil-rate band you have left, and what other exempt gifts you might have made in your will much of which will only be known on your death.  So you need a clever will.

You might also note that this can apply to any or all of a number of different elements of your estate – trusts, joint property, or just your own free assets.  Again something that needs to be thought about quite carefully.

So what is to do?

If you would like to take advantage of this in your own estate, then an amendment to your will.

If you are a beneficiary of an estate you could consider whether to vary the will to take advantage – it works on deeds of variation too.

It is good to know that your generosity, even if not completely boundless, can now be more boundless than before.

If you’d like advice on the changes that would be needed to your will or would like other advice about charitable giving generally then please do get in touch.