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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: 

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. 

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