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October 14, 2016
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IHT Relief Increasing

Inheritance Tax (IHT) relief for charitable donations are increasing based on the latest figures from HMRC. Those wanting to take advantage of the reduced rate of IHT should ensure their wills are carefully worded to leave at least the minimum amount of legacies to charities necessary to trigger the preferential rate.

IHT Relief

The statistics from HMRC provide a breakdown of the tax reliefs for charities and charitable giving over a range of UK taxes and reveal a number of trends in the reliefs being claimed by charities and individuals following charitable donations.

IHT relief has seen a strong increase with £880 million forecast to be claimed in 2015/16. This represents a 15% increase on 2014/15 and a 138% increase from 2000/01.

Whilst IHT relief is variable from year to year, the latest data suggest that more estates that would otherwise be liable to IHT are leaving assets to charity than was the case in previous years.*

Part of this increase may be attributable to the combination of increasing house prices and the nil rate band for inheritance tax being fixed at £325,000 since 2009/10. However, part of this increase may also be attributable to the introduction of the 36% reduced rate of IHT for estates which leave at least 10% of their net value to charity.

The Reduced IHT Rate and Grossing Up

Determining if 10% of the net value of an estate has been left to charity can be complicated where parts of the residue of the estate are exempt (i.e. gifts to spouses/civil partner or charity) and other parts of the residue are gifted “free of tax” to other beneficiaries. In such instances, it may be necessary to gross up the residue of the estate.

It can be difficult to establish if gifts to non-exempt beneficiaries are intended to be free of tax and the personal representatives of an estate will need to consider case law in Re Benham and Re Ratcliffe to determine if grossing up is necessary.

Taxpayers wanting to utilise the reduced rate need to ensure  their wills are properly worded to leave at least 10% of their estate to charity.  Wills that fail to take account of potential grossing up may find that their actual charitable legacies fall below the 10% threshold after accounting for other tax free legacies.

See our recent case study for how PD Tax Consultants provided help to a £5 million estate with grossing up and calculating IHT.

*Due to reporting requirements, there is a time lag between IHT chargeable events and the submission of IHT forms therefore the latest figures include forecasts which are subject to revision.

Contact us today to discuss your tax requirements.
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