IHT: 4% rate reduction. When does it apply?

Where death occurs after 5th April 2012 and where 10% or more of an estate is left to charity, the charitable bequest is tax-free, and the remainder of the estate will attract a 10% discount on the rate of IHT paid. This means it will attract IHT at 36% instead of 40%. 

Relief is given by splitting an individual's estate into three components. These are: 

  • Property that passes by survivorship, e.g. under a joint tenancy.
  • Settled property.
  • The free estate that can be transferred by a will or intestacy. 

The value of each component after applicable reliefs, other than legacies to charity, is calculated. A pro rata share of the IHT nil rate band is then compared to charitable legacies left out of the property in each component. 

  • If the legacies are at least 10 per cent of the value of the component they come out of, then the 36 per cent IHT rate applies to that component.
  • Executors can also elect to merge that component with one or both of the others so as to extend the 36 per cent rate to more of the estate, if charitable legacies add up to more than 10 per cent of the combined components.

Basic example: free estate

John's estate comprises of his house worth £500,000, shares in his family trading business, worth £150,000, he has debts of a mortgage of £45,000 and funeral expenses of £5,000. He made gross gifts six months before his death of £25,000.

The minimum charitable donation that can be deducted from his estate on death on order to qualify for the 4% discount is calculated as*:

House

 

       £

500,000

Shares 150,000  

Less:

Business Property Relief 

(150,000)  
Debts   (50,000)
    450,000

Nil Rate Band

being £325,000 less £25,000

  (300,000)
    £150,000
Charitable donation 10%   £15,000

 

Note that this example ignores the Main Residence Nil Rate Band and which might apply if the house passes to a descendent.

Gift Aid

Using Gift Aid donors may be able to increase their charitable legacies, see: IHT: charitable giving

Comments (3)

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This comment was minimized by the moderator on the site

My Nan diss leaving her estate to the value of £800000.
My pop died earlier this year leaving everything to her.
He’d inheritance bracket being £650000.
She leaves a property of £300000 to charity.
What would the inheritance tax payment be on her...

My Nan diss leaving her estate to the value of £800000.
My pop died earlier this year leaving everything to her.
He’d inheritance bracket being £650000.
She leaves a property of £300000 to charity.
What would the inheritance tax payment be on her estate please?

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Comment was last edited about 4 months ago by Nichola Ross Martin Nichola Ross Martin
This comment was minimized by the moderator on the site

There is an addition error above as the total estate is £450,000 not £600,000.

House 500,000
Shares 150,000
BPR (150,000)
Debts (50,000)
600,000
NRB (300,000) - being...

There is an addition error above as the total estate is £450,000 not £600,000.

House 500,000
Shares 150,000
BPR (150,000)
Debts (50,000)
600,000
NRB (300,000) - being £325,000 less £25,000
300,000
Donation 10% £30,000 - minimum

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This comment was minimized by the moderator on the site

Thank you! It looks as if someone added some Business Property Relief to the example. We have re-jigged it now.

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