HMRC consults on inheritance tax change 1

Finance | Tania Mason | 13 Jun 2011

HMRC has opened a consultation on the proposal to incentivise charitable giving by introducing a lower rate of inheritance tax for those that leave a legacy in their will.

Anyone is welcome to participate in the consultation, A new incentive for charitable legacies but the government is particularly keen to hear from charities and advisers on wills and inheritance tax.

The consultation follows the Chancellor’s announcement in the Budget that estates can reduce their inheritance tax rate by 10 per cent, to 36 per cent, when they leave a charitable legacy of 10 per cent or more of their net estate. The idea is that this will encourage more people to include charitable bequests in their wills.

In his Budget speech in March, the Chancellor said the measure would raise an additional £300m for the sector.

The consultation is about the policy detail and how best to implement the policy, which is expected to apply to deaths on or after 6 April 2012. It closes on 31 August.

Richard Fairbairn, head of the tax & trust team at Lester Aldridge LLP, has pointed out that the lower tax rate will mean that in some cases non-charitable beneficiaries will be left worse off, and warned charities to be mindful of this when contacting their prospective donors.

Directory: HM Revenue & Customs (HMRC) | Lester Aldridge LLP

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Adrian Beney
Partner
Iain More Associates
15 Jun 2011

I'm glad that HMRC is doing this.

Richard Fairbairn's "warning" that non-charitable beneficiaries will be worse off is an odd one though. His example is not comparing like with like. He compares an estate worth £1m with no charitable bequest which is taxed at 40% and one with a charitable bequest taxed at 36%. Of course the non-charitable beneficiaries receive less if someone adds a charitable bequest to their will! It's just that under the new rules, the noncharitable beneficiaries will be less worse off.

Here's how the calculation in the example referenced above should have read:

Death after 6 April 2012 with 10 per cent of estate passing to charity:
Gross estate £1,000,000
Charitable legacy (£100,000)
Nil – rate band (£325,000)
Net estate – taxed @ 36 per cent £ 575,000
IHT £207,000
Balance for non-charitable beneficiaries £693,000

Death BEFORE 6 April 2012 with 10 per cent of estate passing to charity:
Gross estate £1,000,000
Charitable legacy (£100,000)
Nil – rate band (£325,000)
Net estate – taxed @ 40 per cent £ 575,000
IHT £230,000
Balance for non-charitable beneficiaries £670,000

So in fact the new 36% band means that FOR THE SAME LEVEL OF CHARITABLE BEQUEST the non-charitable beneficiaries will, in this example, be £23,000 better off.

Of course it has always been the case that if someone adds any extra bequest, charitable or otherwise, the remaindermen will get less. It's just that now, they will be less worse off.

So this is not news.

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