In the last issue of Individual Matters we reported on the Government’s proposal to encourage legacies to charity by reducing the rate of inheritance tax (IHT) from 40% to 36% for estates in which at least 10% of the taxable estate is left to charity.
The rules have now taken effect for deaths occurring on or after 6 April 2012.
One key issue arising from the Consultation Paper on this topic was how the reduced rate would apply to the different parts of an individual’s estate. Would it only apply to assets passing under a Will, or could it also apply to jointly owned property that passes by survivorship, or to property held in trust? The legislation has clarified that for these purposes a person’s estate will be divided into four ‘components’, the three just mentioned, and also property which had been given away but in which the deceased still ‘reserved a benefit’ at the date of death.
The lower rate will apply to any ‘component’ where the 10% gift to charity test is met unless an election to disapply is made. At first glance it may seem unlikely that anyone would not wish to get the benefit of paying 4% less IHT but there may be situations where, for example, the estate comprises assets which will be complex and/or expensive to value, so that the valuation costs would outweigh the benefit of obtaining the rate reduction.
It is also possible for an election to be made to merge the different components. Suppose an individual’s estate comprises two components: assets passing under a Will, and also a life interest under a trust which is subject to IHT on their death. If a substantial gift to charity has been made by the Will, well in excess of the 10% level, the executors could elect with the trustees of the trust for the two components to be merged. Provided that the value of the gift to charity exceeds 10% of the taxable value of the two components combined, both will benefit from the IHT rate reduction even though the gift to charity is coming only from the individual’s personal assets.
When considering making a gift to charity in a Will to take advantage of the rate reduction it will be important therefore to factor in all the different components of the estate to see how it fits together and particular care may be needed in drafting the terms of the Will.