A new Inheritance Tax (IHT) bequest relief applies from April 2012, but donors may do better using Gift Aid.
However, if a bequest is made during the donor's lifetime, both donor and recipent may be substantially better off.
Giving away 10% of your estate
At present if you wish to give away part of your estate, you can do so and there will be no charge to tax if you survive 7 years following the Gift.
For example:
George has over £1 million in the bank as well as other assets and has a desire to help someone out before he dies. He is paying higher rate tax on his investment income.
If it is assumed that he is paying 40% IHT on his estate, then if gives away 10% of his estate within 7 years of death, the remainder of his estate will suffer tax at 36%.
Under the new proposals the same thing happens if he gives away 10% on death (so no longer any requirement to survive 7 years after the gift).
Old rules v new rules
|
|
Value of estate on death £ |
Tax paid on death
£ |
Cash received by charity £ |
|
Lifetime giving 7 years before death |
900,000 |
360,000 |
100,000 |
|
Death bequest, new IHT relief |
1,000,000 |
360,000 |
100,000 |
Under the current rules charities are more likely to receive cash earlier.
Lifetime giving plus Gift Aid
By Gift Aiding a lifetime gift both donor and charity may be better off.
For example:
George still decides to give at least 10% of his excess cash to his chosen charity. If he makes a gift of £135,000, assuming that he pays sufficient tax, his charity can reclaim £33,750 in tax, and if he is a 40% taxpayer, he can also reclaim £33,750 making the net cost of his gift just £101,250 (approximately 10% of his income as planned).
If he dies before making the gift and assuming that his exempt amount is used up he will pay 40% of £1 million = £400,000.
If he dies 7 years after making the gift, he will pay tax of 40% of £898,750 = £359,500, and the charity will have received an extra £33,750, under Gift Aid, or 25% more than planned. He can give this away next year!
Under the new charitable bequest proposals, George could give away 10% of his estate in return for a 10% discount in tax paid: tax due on £1,000,000 @ 36% = £360,000, however the charity is now out of pocket to the tune of £33,750
Gift Aid v Death bequest relief
|
|
Value of estate on death £ |
Tax paid on death
£ |
Cash received by charity £ |
|
Lifetime giving with Gift Aid |
898,750 |
359,500 |
168,750
|
|
Death bequest |
1,000,000 |
360,000 |
100,000 |
Small print and links
Note that: these illustrations are fairly simplistic examples and in real life "George" might be paying tax at 50% which will make Gift Aid even better, and he might consider reducing IHT by using a range of different measures including making regular gifts out of income.
For further assistance on IHT, charitable donations or any other tax problem please contact the Virtual Tax Partner support line.
Join us on LinkedIn 
