Reduced rate of IHT for estates leaving gifts to charity

By Tolley

The following Trusts and Inheritance Tax guidance note 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
  • Meaning of charity and registered club
  • Automatic entitlement to reduced rate
  • How can the charitable bequest condition be met?
  • Forward planning

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

IHTA 1984, s 23

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.

IHTA 1984, Sch 1A, para 2(2)

The estate is divided into components as follows:

  • the survivorship component
  • the settled property component
  • 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

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