Plan ahead to take advantage of the 36% rate of inheritance tax

The Chancellor intends to boost charitable giving by reducing the rate of inheritance tax on estates where at least 10% is left to charity. Rose Phelps explains the practical implications of this new tax relief.

In his 2011 Budget, the Chancellor announced the intention of reducing the rate of inheritance tax on estates where at least 10% is left to a charity or a registered community amateur sports clubs.

Gifts to UK charities are already exempt from inheritance tax, but the idea of making sizeable gifts to charity and so reducing the rate of inheritance tax on the rest of the estate caught the public imagination and prompted much speculation in the national and professional press.

This new relief is intended to boost charitable giving but as even the Government website said of it:

"No beneficiaries will be better off, just the charities." [i]

This should not be seen as a tax-saving measure – it is better to see it as an additional incentive to give to charity. Gifts in wills to charities are much less common than most people think, and this new relief may encourage or increase charitable giving in wills.

What sounded like a simple idea in the Chancellor’s speech is not so simple in practice. Adding this new relief onto an already complex inheritance tax system requires detailed provisions in the Finance Bill 2012 and is expected to be finalised over the Summer.

The final form of the legislation it not yet clear, but what we know now is that:

• Where it applies, the reduced rate of inheritance tax will be 36% as opposed to the current 40% flat rate.
• As currently drafted, the relief applies only to deaths on or after 6^th April 2012.
• It will not matter if the will was made before that date, but clients would be wise to review their old wills and take advice if they want to add or increase gifts to charity, or to be sure that existing wording of charitable gifts in the wills is appropriate.
• The relief can apply to trust assets passing on death, or to assets owned jointly, as well as to the "free estate" of someone who dies. It can also apply where the beneficiaries agree to vary the estate to give more to charity than was provided under the will. Detailed procedures apply in each case.
• The relief may be complex to work out. If you have assets in your sole name, a life interest in a trust fund, joint accounts or property, then the calculation will be more complex still.

There are a number of practical issues which you should consider in advance. For example, if you only want the charitable gift to be made if there is some inheritance tax to pay on the rest of the estate, then the will must be very carefully worded.

You may find you have already made use of existing exemptions, such as the surviving spouse exemption, agricultural property relief or business property relief. If the result is that no inheritance tax is chargeable on your estate, then the relief will be of no use.

Giving to charity is often thought of as an efficient means of inheritance-tax reduction, but of course the other beneficiaries of your will are actually getting less than they would have got without the gift to charity – tax relief or no tax relief.

It is always important to work out what your beneficiaries are likely to receive at the end of the day, particularly if they are financially dependent on you. Maybe you cannot spare 10% for charities; even a large estate may not provide comprehensively for growing children or elderly relatives in the long term.

Sadly, unhappy beneficiaries may become litigious beneficiaries so it may be sensible to discuss with the family how you have provided for them and your philanthropic intentions. This can reduce the risk of expensive litigation after your death and a difficult situation for your executors and the charities.

The key lies in understanding how the relief will affect your particular estate and usually that will require professional advice and planning. Homemade wills, or wills made some years ago, may be the subject of uncertainty and dispute with HMRC after the death has occurred.

Working out after a death whether the relief applies will also be technically tricky for the lay executor, who may not claim the relief, or claim it inappropriately. Similarly, beneficiaries may miss opportunities to vary the will to obtain the relief. Here again a professional can help assess how the relief affects the estate.

There is time to plan ahead, as the Finance Bill makes its way on to the statute book over the summer. There are a number of practical points for you to consider, and taking time to do so now means you will be ready to discuss them with us in a few months’ time.

Rose Phelps is a solicitor in Keystone’s Private Client Team specialising in contested probate and legacy matters as well as non-contentious matters.

This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date this article was published.