Charitable Gifting and the Burden of Inheritance Tax

Leaving a charitable gift under the terms of a Will is one way to not only reduce your Inheritance Tax (IHT) but also help good causes.

Any gift left to charity is exempt from IHT with IHT charged on the value of the estate after charitable donations. Furthermore, where 10% or more of the net value of an estate is left to charity, the rate of IHT charged on an estate, exceeding the available allowances, falls from 40% to 36%.

However, the rules are complex where an estate is left to charities (exempt for IHT purposes) and family members/friends etc (non-exempt for IHT purposes). An incorrectly drafted Will could mean the charities receive less than intended which could result in a claim by them.

 

Example:

By the terms of the Will, the deceased leaves half of his residuary estate to charity and the remaining half divided between friends.

Half of the estate (£500,000) is taxable for IHT purposes. The reduced rate of tax is payable so 36% of £500,000 = £180,000.

 

Where does the burden of the Inheritance Tax fall? 

Option 1 – founded in the case of Re Benham

  1. This option states that the gifts should be calculated after the deduction of IHT.
  2. It is more beneficial for non-exempt beneficiaries, the friends of the deceased in the example above as they are likely to receive a larger gift in comparison to the exempt beneficiaries, the charities.
  3. This option often results in a larger payment of IHT and a smaller gift to the exempt beneficiaries, the charities.

Option 2 – founded in the case of Re Ratcliffe 

  1. This option states that the gifts should be calculated before the deduction of IHT.
  2. It is more beneficial for exempt beneficiaries, the charities as they will receive a larger gift in comparison to the non-exempt beneficiaries.
  3. This option often results in a smaller payment of IHT, but also a smaller gift to the non-exempt beneficiaries, the charities.

 

Ensuring your Will is professionally drafted to include your chosen option regarding the burden of IHT is important and could avoid a dispute between family/friends and a favoured charity.

 

Sigourney is a qualified Solicitor in our Private Client team. She has over 5 years' experience in a range of Private Client work including probate matters, Wills, Lasting Powers of Attorney and Court of Protection work. She is personable, approachable and sensitive to difficult situations. She endeavours to provide clients with clear advice in a supportive manner.