Changes to Inheritance Tax rates when making charity bequeaths

While there were no sweeping changes to Inheritance Tax announced in this year’s Budget, Chancellor George Osborne did reveal that from April 2012 the Inheritance tax rate would be cut from 40 per cent to 36 per cent where an individual leaves at least 10 per cent of their estate to charity.

This allowance is in addition to the exemption that already exists that means any gift to a charity is free of Inheritance Tax.

To give you an example of how this works in practice, consider the following example:

Bob dies leaving £1million. In both of the following options the first £325,000 can be left free of Inheritance Tax, which leaves a taxable estate of £675,000.

Option 1: Bob leaves his estate to his son Andy.  Tax would be paid at 40 per cent on £675,000 (£270,000). Andy would inherit £730,000.

Option 2: Bob leaves £100,000 (10 per cent of his estate) to Charity A and the remainder to Andy. Charity A receives £100,000 free of inheritance tax, leaving £900,000. £575,000 will be taxed at 36 per cent (£207,000).  Andy would inherit £693,000.

As you will see, leaving 10 per cent of your estate to charity will not increase the gift to your main beneficiary but it will reduce the amount of tax you pay and could provide some much needed funds for a good cause or two.

If you would like more advice on inheritance tax, or any other wills, probate and trusts issue, contact Rachel Conroy on 01772 258321.