Currently gifts to charity under a Will are exempt from Inheritance Tax (IHT). In the hope of encouraging philanthropic donations upon death a new 10% charity relief has been created.
To qualify for the reduced rate you must leave at least 10% of the net value of your estate to a qualifying charity. Net value of an estate is the sum of assets after deducting all applicable reliefs and the nil-rate band (currently £325k). The rate of IHT would then be reduced to 36%. The charitable gifts remain tax free but other beneficiaries may receive more, as the tax applied is less.
Of course, it’s rare when making a Will that an individual can advise with accuracy the value of their estate and therefore the amount which needs to be left to charity for the relief to apply. So there is concern by estate planning specialists that Wills will require reference to a formula or use of a discretionary trust – both of which inevitability require a more complex Will.
There is also concern that administration costs may increase as charities scrutinise the executor’s calculations. Professional executors may be required to ensure both the charities and other beneficiaries receive the correct inheritance.
While charitable giving can only be applauded, the new relief, while supposedly straight-forward, may in practice deter donors.
With this in mind, some in the industry are calling for a more simple system of credit against IHT for charitable giving.