Guidance published on reduced rate of inheritance tax

HMRC has released guidance on the new reduced rate of inheritance tax available to estates which leave a ten per cent donation to a registered charity.

Currently, estates worth over £325,000 are liable to pay inheritance tax at a rate of 40 per cent, however, as of the 6 April 2012 estates leaving 10 per cent to charity may pay a reduced rate of 36 per cent.

HMRC has stated that in order to qualify for the reduced inheritance tax rate, individuals must leave at least 10 per cent of the net value of an estate to a qualifying charity, and have outlined the following points:

  • The net value of an estate is the sum of all assets after any debts, liabilities, reliefs, exceptions and the nil-rate band have been deducted.
  • A qualifying charity is one that is recognised as a charity for tax purposes by HMRC and will have a unique charity reference number.
  • Different 'components' of an estate may be liable for different rates of inheritance tax and must be taken into consideration. For instance, assets that are owned jointly through 'survivorship', assets in trust, and those which are owned outright, may all be treated differently.
  • It may be possible to merge one or more components, such as 'gifts with reservation', to gain the maximum benefit from the reduced rate.

Changes to the inheritance tax rate form part of the Government's 'big society' initiative to encourage charitable giving. However, Tax and charitable donations have come under the spotlight in recent weeks after Chancellor George Osborne revealed plans to cap tax reliefs -including donations to charity - at £50,000 or 25 per cent of a person's income from 2013, following accusations that wealthy individuals were exploiting the system to avoid paying tax.

According to calculations by the Telegraph, the move is to cost the Treasury £25 million for the tax year 2012/13, although it is hoped that charities will receive an additional £300 million over the coming three years.

HMRC is also currently altering the way charitable donations are claimed through Gift Aid by reducing the amount of required paper work for smaller donations.

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