Print

This is a freeview 'At a glance' guide to Inheritance tax (IHT) relief for charitable bequests on death.

When does the 4% Inheritance Tax (IHT) rate reduction apply?

At a glance

Where death occurs after 5th April 2012 and 10% or more of the net 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. 

Where the reduced rate applies it is automatic though the relevant IHT forms must still be completed for the estate. It is possible to opt out of the reduced rate if this gives a more favourable result, such as where the cost of formal valuations exceeds the tax saved.

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 which might apply if the house passes to a descendent.

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.

Following Brexit the position for gifts to EU charities is uncertain and it is possible that the relief may cease to apply. Individuals whose wills include bequests to EU charities should review these and consider whether changes should be made, for example, to instead leave assets to a UK charity which has links to their chosen EU charity.

Gift Aid

Donors may be able to increase their charitable legacies by using Gift Aid, see: IHT: Charitable giving


Squirrel ad


Are you enjoying our content? 

Thousands of accountants and advisers and their clients use www.rossmartin.co.uk as their primary TAX resource.

Register with us now to receive our unique FREE Tax Planning Tips and Advice Guide & our FREE OMB Newsletter.