Individuals can now benefit from a reduced rate of inheritance tax of 36 percent when they leave at least ten percent of the net value of their estate to a qualifying charity.
However, there are a number of factors that individuals will need to take into account, which have been further clarified by HM Revenue & Customs (HMRC).
Firstly, the organisation to which the bequest has been made must be recognised as a charity for tax purposes by HMRC, and will therefore have an HMRC charity reference number.
Secondly, the net value of the estate – that is, the amount left after deducting the nil rate band, as well as any debts, liabilities, reliefs and exemptions – is divided into three components.
The components comprise assets which are:
- jointly owned with someone else as joint tenants, and pass to the surviving owner
- held in trust
- owned outright or as a tenant in common
Each of these categories will need to be assessed separately to see if the assets qualify for the reduced rate of inheritance tax.
While it is feasible that one component will be taxed at 40 percent and the others at 36 percent, there is the possibility of combining various components in order to achieve maximum benefit.
However, a number of considerations need to be taken into account:
- gifts with reservation can only qualify for the 36 percent tax rate if they are combined with one or more of the above components
- assets which pass to the surviving owner must be taxed at 40 percent unless they are combined with another component or are reallocated through an instrument of variation (except when they are part of a trust)
- if the assets do not qualify for the lower rate of inheritance tax, or have not been left to a qualifying charity, the beneficiaries can amend this through an instrument of variation
Consequently, it is vital that individuals seek professional advice to ensure that their Will is structured in the right way to achieve maximum benefit from any legacy donation.