A discount on the rate of Inheritance Tax (IHT) applies for deaths after 5 April 2012 where 10% or more of the net value of the estate is left to charity under the terms of a will, however donors may improve their charitable objectives by making a lifetime donation under Gift Aid.

 Where 10% or more of an estate is left on death to charity the estate will attract a 10% discount on the rate of IHT paid. This means it will attract IHT of 36% instead of 40%. The charitable gift itself is exempt from IHT.

If a bequest is made during the donor's lifetime, both donor and recipent may be substantially better off.

Previously the courts have ruled that the charity must be subject to the jurisdiction of the UK or EU courts for the bequest to qualify for the discount. The Court of Appeal in The Executors of Beryl Coulter decided that Jersey was not part of the UK for these purposes. However, this decision was overruled by the Supreme Court in Routier and Anor v HMRC [2019] UKSC43 who found that this interpretation of charity contravened EU laws as to the freedom of movement of capital. As EU law takes precedence in areas of conflict between UK and EU law, the IHT relief could apply.

For example:

George has an estate worth £1 million just before his death. He never married and has no available nil rate band as a result of making lifetime gifts to his neice. He decides to gift at least 10% of his estate to charity. Compare tax relief if he makes his gift in life or on death.

If he makes a gift of £135,000 whilst alive, assuming that he pays sufficient income or capital gains tax, his charity can reclaim £33,750 in tax under Gift Aid, 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). The death value of his estate is £898,750 and IHT is £359,500.

If George leaves 10% of his estate on death £100,000 in return for a 10% discount in tax paid: tax due on £900,000 @ 36% = £324,000, however the charity is now out of pocket to the tune of £33,750.

 Result: Gift Aid v Death bequest relief 

By Gift Aiding his cash donation before death George saves £33,750 in income tax and his estate pays £359,500 in IHT so £325,750 of tax is paid in total.

By making a bequest on death George pays £324,000 in IHT.

George's estate is £1,750 better off making a charitable donation by will, however the position for the charity is in reverse. The charity will prefer George to donate under Gift Aid whilst alive in order to claim back tax under Gift Aid relief.

 

Value of estate on death before IHT

£

Tax paid on death, less gift aid relief in life

 

£

Cash received by charity

£

Lifetime giving with Gift Aid

 

898,750

 

359,500 (IHT @ 40%) less £33,750 (Gift Aid) = £325,750.

 

168,750

 

Death bequest

900,000

324,000 (IHT @ 36%)

100,000

 

Small print and links

Note that: these illustrations are fairly simplistic examples and in real life "George" might be paying tax at 45% 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.

 

Comments (1)

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This is a very illuminating example covering an angle I hadn't previously considered. However I believe there is an error in the 2nd para of the example. I think the phrase "(approximately 10% of his income as planned)" should read...

This is a very illuminating example covering an angle I hadn't previously considered. However I believe there is an error in the 2nd para of the example. I think the phrase "(approximately 10% of his income as planned)" should read "(approximately 10% of his ESTATE as planned)".

(Nowhere in the example is the amount of George's income specified other than to say he is a 40% tax payer).

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