Take part in our new Family Business Survey and have your say! Click here
On 10 June 2011, the Government published a consultation document entitled 'A New Incentive for Charitable Legacies'. The subject of the consultation is a proposed lower rate of inheritance tax on estates which leave at least 10% to charity. This builds on the announcement made during the Chancellor's Budget speech in March, which first outlined the proposal. The Government's proposal would reduce the rate of IHT from 40% to 36% for estates that include charitable legacies of at least 10% of the 'net estate', for deaths occurring on or after 6 April 2012.
Even under these new rules there is still a net cost to the estate where 10% or more of the net value of the estate is paid to charities prior to distribution to beneficiaries. However the cost is reduced due to the lowering of the 40% IHT rate to 36%.
The Government is aware that, where a charitable legacy is close to 10% of the net estate, a small difference to the amount gifted to charity could have a much larger impact on the estate's IHT liability. There are no plans to apply tapering or any other mechanism to mitigate this 'cliff edge' effect. It is therefore crucial to plan the value of any charitable legacies carefully, to avoid missing out on this relief.
A deed of variation can be implemented to vary the amount left to charity if the charitable legacy falls short of the 10% required, provided the beneficiaries agree to the variation. The deed of variation can be made to have effect for inheritance tax purposes, so could be used to ensure that the reduced rate of IHT applies. This would be particularly useful where the charitable legacy is close to but just under the 10% threshold.
The present consultation on these issues is due to close on 31 August 2011.
Disclaimer – Please note: The ideas shared with you in this article are intended to inform rather than advise. Taxpayers’ circumstances do vary and if you feel that tax strategies we have outlined may be beneficial it is important that you contact us before implementation. If you do or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.
If you like this article and would like our FREE updates sent straight to your inbox then subscribe to our monthly newsletterSubscribe
All content © 2015 Armstrong Watson. All Rights Reserved. Website by Simon Pighills.
Armstrong Watson LLP is a limited liability partnership registered in England and Wales, number OC415608. The registered office is 15 Victoria Place, Carlisle, CA1 1EW where a list of members is kept. Armstrong Watson Accountants, Business & Financial Advisers is a trading style of Armstrong Watson LLP. Armstrong Watson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities.
Armstrong Watson Audit Limited is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Registered as a limited company in England and Wales No. 8800970. Registered office: 15 Victoria Place, Carlisle, CA1 1EW
Armstrong Watson Financial Planning Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 542122. Registered as a limited company in England and Wales No. 7208672. Armstrong Watson Financial Planning & Wealth Management is a trading name of Armstrong Watson Financial Planning Limited. Registered Office: 15 Victoria Place, Carlisle, CA1 1EW