In this year’s Budget Statement, Chancellor George Osborne announced a change to the Inheritance Tax (IHT) regime, which he hopes will encourage more people to leave part of their estates to charity. Part of the Coalition Government’s “Big Society” initiative, it is proposed that, for deaths occurring after 5 April 2012, the rate of IHT will be reduced by 10% (from 40% to 36%) for estates that include charitable legacies of at least 10% of the net taxable estate (what is left after deduction of debts, other IHT reliefs and the nil rate band).

This should be good news for charities, although since the changes were announced a number of leading charities have gone on record as saying that the changes could act as a disincentive to lifetime charitable giving, potentially causing them cashflow difficulties. It remains to be seen whether this fear will be borne out in practice.

The fine detail of the new rules is not yet known, and draft legislation is not expected until early next year. In particular it is not clear as to exactly which assets will be treated as included in an estate for these purposes -- for example, the position with regard to jointly owned assets and trust assets in which the deceased had an income entitlement at death (both of which will also be subject to IHT at the date of death) has still to be confirmed.

What does seem clear is that no taper will apply where a charitable legacy is nearly, but not quite, 10% of the net estate. A small increase to a charitable legacy could therefore have a much larger impact on the IHT burden of the estate and it will be crucial to plan any charitable bequests very carefully to avoid missing out on the relief. For testators who wish to give part, but not all of their estate, to charity and who want to benefit from the reduced IHT rate, the options will be as follows:-

  • A provision in the Will leaving a particular amount, portion or percentage of the estate to charity. Of course, asset values and IHT are moving feasts and the danger here will be that the legacy may not meet the 10% test at the time of death. However, once the detail of the legislation is known we intend to draft a formula legacy clause which we hope will be certain to meet the 10% test.
  • A Discretionary Will Trust. Here the Trustees would have discretion in deciding how the estate is to pass amongst a stated class of beneficiaries, which would include nominated charities. Once the value and IHT position of the estate is clear, the Trustees will be able to calculate how much should pass to these charities to secure the 10% IHT reduction. The balance of the estate could then pass to the other beneficiaries in accordance with directions provided by the deceased.