As expected draft legislation to provide for a lower 36% rate of inheritance tax (IHT) when at least 10% of an estate is left to charity has been published. This is simpler than many feared and HMRC appear to have been listened to the comments of many charities and advisers.
Baker Tilly analysis
Given the questions asked in this summer’s consultation, you could be forgiven if you expected swathes of complex legislation to enact what is essentially a simple incentive to leave a legacy to charity. To their credit HMRC have come up with what is, probably, the simplest regime we are likely to get, although it does involve a few calculations. Whether these changes will significantly increase the amount left to charity though remains to be seen.
In detail
The new regime will apply to deaths on or after 6 April 2012.
The proposal is to split an individual’s estate into three components:
- Property that passes by survivorship, settled property and the rest.
- The value of each component after applicable reliefs (other than legacies to charity).
- A pro rata share of any IHT nil rate band, is compared to charitable legacies left out of the property in each component.
If the legacies are at least 10% of the value of the component they come out of, then the lower IHT rate applies to that component. If the legacies are more than 10% of the value of the component, an election can be made to merge that component with one or both of the others so as to extend the 36% rate to more of the estate if charitable legacies are 10% of the combined components.
While the lower rate will be the default position where the conditions are met, it will be possible to opt out, and pay the full 40% inheritance tax rate.