Reduced rate of IHT for estates leaving gifts to charity

Produced by Tolley

The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Reduced rate of IHT for estates leaving gifts to charity
  • Conditions for the reduced rate
  • Mechanics of the valuation
  • The components
  • Survivorship component
  • Settled property component
  • General component
  • Election to merge components
  • Meaning of charity and registered club
  • Charity
  • More...

Gifts to charity benefit from full exemption from inheritance tax. See the Exempt transfers guidance note.

Where the disposition of a deceased estate includes a gift to charity, part or all of the remaining taxable estate will benefit from a reduced rate of inheritance tax, if the required conditions are met. The rate is reduced from 40% to 36% on the qualifying portion of the estate.

This relief applies where the death occurs on or after 6 April 2012.

Conditions for the reduced rate

The reduced rate applies to the non-exempt part of one or more components of the estate if gifts to charity make up 10% or more of a baseline amount of the components in question. The baseline amount is the value of the component, including the charitable gift, but after the deduction of liabilities, IHT reliefs, other exemptions, and the nil rate band.

The mechanics of the valuation are described below.

The estate is divided into components as follows:

  1. the survivorship component

  2. the settled property component

  3. the general component

IHTA 1984, Sch 1A, para 3(1)

The make up of each component is described below.

The value of the assets passing to a charity or registered club from a particular component will be compared to the baseline amount of the component. If the 10% test for a component is passed, IHT will be charged on that particular component at 36%.

If the assets passing to charity / registered clubs from one component of the estate exceeds 10%, other non-qualifying components may be merged by making an election (see below).

The fact that the estate is split may seem unduly complex but it can work to the taxpayer’s advantage. It means that even if less than 10% of the whole estate is given to charity, one or more components of the estate may qualify for the reduced rate if at least 10% of one component has been donated.

Mechanics of the valuation

The following steps must be followed for each component of the estate:

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