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It is even better to give and receiveā€¦

With the start of the New Year many of you are taking the opportunity to become more organized and sort out many of those jobs that never seem to get done! Writing a Will is one of those tasks. The good news though is that it’s not too late and financially there has never been a better time than now.

Everyone will agree that receiving a reduced rate of tax is well worth having, even if you have to give something for it.  For inheritance tax we were promised a 10% reduction in the rate in the 2011 Budget speech – which on closer scrutiny revealed a reduced rate of 36%. 

Following a period of consultation and refinement of some lengthy rules to achieve this, the legislation was finally enacted in the summer and last week HMRC updated their internal guidance manuals to reflect the changes. 

To achieve this reduced rate of inheritance tax, 10% or more of the deceased’s net estate needs to be given to charity.  There are complexities where the deceased’s assets are held in joint names or in trust, but HMRC have helpfully provided an online reduced rate calculator to provide some assistance. 

However, taking a straightforward example of an estate worth £1m, the after tax estate would be worth £730,000 if no charitable donation is made.  If a 10% gift is made from the estate, after taking into account a nil rate band of £325,000, the after tax estate would be worth £713,800 with a charity(ies) receiving a £67,500 donation.  In other words it has only cost £16,200 for a charitable gift of £67,500. 

Despite earlier reviews by the Government, income tax relief remains available for charitable donations, up to the 50% rate of tax, but even for those top rate taxpayers a gift of £67,500 would come with a net cost of £33,750 – more than double the cost compared to gifts made on death where the reduced rate can be achieved. 

It is now well worth considering whether charitable donations should be made during lifetime or left as legacies in the will.  Post death variations can be made to wills but would mean that beneficiaries would need to agree to a reduced net estate.  So, if a positive decision is made to defer charitable donations from lifetime to the death estate, it is probably best making that clear with express provisions in the will.

Read our free guidance Leave a legacy and download our leaflet in Resources ‘Every gift in a will makes a difference’.

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