On 10 June 2011, the Government published a consultation document entitled ‘a new incentive for charitable legacies’. The subject of the consultation is a proposed lower rate of inheritance tax on estates which leave at least 10% to charity. This builds on the announcement made during the Chancellor’s Budget speech in March, which first outlined the proposal. The Government’s proposal would reduce the rate of IHT from 40% to 36% for estates that include charitable legacies of at least 10% of the ‘net estate’ for deaths occurring on or after 6 April 2012.
Even under these new rules there is still a net cost to the estate where 10% or more of the net value of the estate is paid to charities prior to distribution to beneficiaries. However the cost is reduced due to the lowering of the 40% IHT rate to 36%.
The Government is aware that where a charitable legacy is close to 10% of the net estate, a small difference to the amount gifted to charity could have a much larger impact on the estate’s IHT liability. There are no plans to apply tapering or any other mechanism to mitigate this ‘cliff edge’ effect. It is therefore crucial to plan the value of any charitable legacies carefully to avoid missing out on this relief.
A deed of variation can be implemented to vary the amount left to charity if the charitable legacy falls short of the 10% required provided the beneficiaries agree to the variation. The deed of variation can be made to have effect for inheritance tax purposes, so could be used to ensure that the reduced rate of IHT applies. This would be particularly useful where the charitable legacy is close to but just under the 10% threshold.
The present consultation on these issues is due to close on 31 August 2011.
Lynn Green
Trust Partner
