What is a charity?
A charity will only qualify as a charity if it is recognised by HM Revenue and Customs (HMRC) for tax purposes. Each charity will have its own unique reference number for this purpose and this can be ascertained fairly easily from the organisation itself. The gift must also be for ‘charitable purposes’ which is defined in the Charities Act 2006.
The 10% calculation
On death, assets are, broadly, divided into three components: those that pass automatically to a survivor outside the will (survivorship property); those that are held within a trust for the benefit of the deceased for their lifetime (settled property); and the rest of the estate (the free estate).
The 10% test will be applied to the net value of each of these components to determine if the reduced inheritance tax rate can be used. The discounted rate of inheritance tax will only apply to the components of the estate that satisfy the 10% test.
The net value of each component is ascertained by deducting any exemptions, such as those for business assets that qualify for relief (Business Property Relief), similarly agricultural property (Agricultural Property Relief) and the Nil Rate Band (where a nil rate of inheritance tax applies - currently £325,000).
For non-domiciled persons, the reduced rate will be limited to assets on which the individual is liable to pay inheritance tax.
Is it worthwhile?
Individuals looking to save for family and friends will ask whether the charitable exemption is worthwhile pursuing if the objective is only to reduce the tax for non-charitable beneficiaries. The calculations are fairly complex but, in short, non-charitable beneficiaries will receive less if 10% of the estate is gifted reducing the tax to 36%, instead of leaving the whole estate with a 40% tax liability.
The exception to this is if the only assets comprised in the estate are in the ‘free estate’ component. In this case, it may be that, if a testator increases a gift of his estate to charity to 10%, then the price of philanthropic giving to this extent could be borne entirely by HMRC and not at all by non-charitable legatees. If a large proportion of an estate is being left for charitable purposes in any event, then the legislation may be worthwhile.
Will this encourage gifts to charity?
In my view, it is unlikely that the new legislation will encourage additional gifts to charity in this time of austerity. The complex calculations required may discourage utilisation but those who wish to leave a substantial charitable gift are likely to do so in any event, irrespective of the new legislation.