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HMRC publishes guidelines on reduced IHT for charity donations

HM Revenue & Customs (HMRC) has published new guidance on the reduced rate of inheritance tax for charitable gifts.

29 August 2012

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Under new rules that came into force from 6 April 2012, estates can pay a reduced rate of 36 per cent of IHT in return for a ten per cent donation to a ‘qualifying’ charity. IHT of 40 per cent is usually payable on estates worth over £325,000.

A qualifying charity is an organisation that is recognised as a charity for tax purposes by HMRC. For inheritance tax purposes a community amateur sports club (CASC) is also treated as a qualifying charity.

A person’s estate for IHT is made up of all the property to which they are beneficially entitled, so there may be a number of chargeable elements to the estate. The reduced rate applies separately to each component that makes up an estate, so it is possible that one component may bear tax at 36 per cent while others pay tax at the full rate.

To work out whether the reduced rate applies, an estate and its assets are broken down into three components: assets that individuals own jointly with someone else that pass by ‘survivorship’; assets in trust; and assets that individuals own outright or as tenants in common with someone else.

HMRC has produced a calclulator to work out what rate of tax will apply. Key steps in working out whether the estate passes the ten per cent test are:

Step 1: work out which assets fall into each component - remember not all estates have all three components.

Step 2: add up the assets then deduct any debts, liabilities, reliefs and exemptions that apply to each component.

Step 3: apportion the inheritance tax nil-rate band - including any transferable unused nil rate band from a spouse or civil partner - between the number of components being used and any assets classed as ‘gifts with reservation’.

Step 4: deduct the apportioned value of the nil-rate band from each component.

Step 5: add back in the value of the donation to charity - this result is the ‘baseline amount’ for each component.

Step 6: divide the baseline amount by ten.

Step 7: work out whether the charitable donation is more than the result of the sum at step 6.

For more information see http://www.hmrc.gov.uk/manuals/ihtmanual/ihtm45000.htm

 

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Charities Tax & Wealth structuring