This Government’s record on charities is decidedly patchy, not perhaps what one might expect of the people who brought you the Big Society. But there is a newly-introduced relief which is a significant incentive for taxpayers to leave significant charitable donations in their wills.

If a taxpayer leaves at least 10% of his or her chargeable estate (after the £325,000 to £650,000 inheritance tax nil rate band) to charity, the rate of tax applied to the estate is reduced from 40% to 36%. The impact of this is best uillustrated by a series of examples, for which I am indebted to Robert Jamieson, tax lecturer extraordinaire:

Example 1

The taxpayer has an estate of £950,000. He is single and leaves his estate to his nephew, except for an IHT exempt bequest to charity of £25,000.

The inheritance tax payable is (£950,000 – £325,000 – £25,000) * 40% = £240,000, and nephew thus inherits £685,000. The estate is distributed thus:

Nephew                               £685,000

Charity                                   £25,000

HMRC                                   £240,000

Example 2

If Donald decides to increase his charitable legacy to £62,500, the inheritance tax payable is (£950,000 – £325,000 – £62,500) * 36% = £202,500. The estate is distributed thus:

Nephew                                £685,000

Charity                                    £62,500

HMRC                                     £202,500

Nephew is thus no worse off, and charity has benefitted to the tune of £37,500, all by way of inheritance tax saving.

This can get even cleverer if there is a surviving spouse:

Example 3

Estate is £1.2 million, of which £600,000 is left to widow, £25,000 to charity and residue to son.

The amount of free estate not exempt by way of spouse transfer or nil rate band is (£1,200,000 – £600,000 – £325,000) = £275,000, and as the donation is less than 10% of this, the IHT rate is 40%. The estate is thus ditributed as follows:

HMRC (£1,200,000 – £600,000 – £325,000 – £25,000) * 40% = £100,000

Spouse                                                                                                                        £600,000

Charity                                                                                                                          £25,000

Son                                                                                                                               £475,000

If the taxpayer increases the charitable legacy to £30,000 it is more than 10% of the non-exempt estate, and thus the IHT rate is 36%. The result is now:

HMRC (£1,200,000 – £600,000 – £325,000 – £30,000) * 36% =    £88,200

Spouse                                                                                                                        £600,000

Charity                                                                                                                          £30,000

Son                                                                                                                                £481,800

Thus charity is £5,000 better off, son is £6,800 better off and HMRC is £11,800 worse off.

I urge you to think about your own circumstances, and whether you could make a bequest to your local church or other charity without adverse impact on your intended beneficiaries.

Reproduced from “For All The Saints”, the blog of All Saints Hale Barns with Ringway PCC (www.allsaintshalebarns,wordpress.com)

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