Charitable Deed of Variation – a cheap form of giving.
The Government allow extra inheritance tax (“IHT”) relief for people leaving at least 10% of their net free estate on death to charity (“the 10% Test”) with the intention of increasing charitable giving. If not in the Will, then the same thing can be accomplished through a deed of variation.
As has always been the case, the gift to charity is completely free of IHT. However, the effect of the new relief (“the Relief”) where it applies is that the rest of the deceased’s net free estate going to the testator’s non charitable beneficiaries bears IHT at the lower rate of 36%, instead of at the normal IHT rate of 40%.
For deaths on or after 6 April 2012, there can be an extra advantage to using a charitable Deed of Variation to make donations to a charity from a deceased persons’ assets. Costs do vary depending on complexity but there is a guide here. Strangely, the larger the percentage gift, the more straightforward the process, at least for Charitable Relief on its’ own.
Gifts to charity have always been free of Inheritance Tax, but this new charity relief extends the advantage to the NON-charitable beneficiaries if the necessary condition is met. The gift can be contained in the Last Will or be added after death by way of a charitable deed of variation.
What you have to do is to leave 10 percent or more of the deceased person’s net estate (after deducting IHT exemptions, reliefs and the nil rate band) to charity.
The rest of the estate can then benefit from a rate of Inheritance Tax from 40% to 36%.
Let’s take us an estate with a taxable amount of £1,000,000 (we have ignored the Residential Property Nil Rate Band to keep things simple.).
Inheritance Tax would normally be £400,000 leaving £600,000 for the beneficiaries.
Leave £100,000 (10%) to charity which leaves a taxable amount of £900,000 which is then taxed at the rate of 36%:
£900,000 less 36% (which is £324,000) leaving £576,000 for the beneficiaries.
So your charitable deed of variation has allowed you to make a charitable gift of £100,000 at a cost of just £24,000. (Update – under current tax rules, such a variation can be even more profitable for all concerned – see below.) Even with our very modest fee, of course!
Here is the HMRC information on the topic:
Inheritance Tax: Reduced Rate for Estates Leaving 10 Per Cent or More to Charity.
Who is likely to be affected?
Primarily people who are considering leaving, or who have already left, a charitable legacy in their will. The personal representatives of people who have died and the beneficiaries of their estates may also be affected. Solicitors, estate practitioners, accountants and other professional advisers who deal with or advise on wills, estates and inheritance tax (IHT) will also be affected.
General description of the measure.
Legislation was introduced in Finance Act 2012 to provide for a reduction in the rate of IHT from 40 percent to 36 percent where 10 percent or more of a deceased person’s net estate (after deducting IHT exemptions, reliefs and the nil-rate band) is left to charity. The measure applies to deaths on or after 6 April 2012.
Policy objective.
This policy supports the Government’s aim to encourage charitable giving, promote greater philanthropy, and links to the Government’s objective of fairness in the tax system. The aim of the policy is to act as an incentive for people to make charitable legacies, or to increase existing legacies, and so increase the amount charities receive from estates.
Background to the measure.
At Budget 2011 the Chancellor of the Exchequer announced a package of measures to support philanthropy and encourage charitable giving by donors at all life stages. A consultation document, A new incentive for charitable legacies, was published on 10 June 2011 on the HMRC website. The Government has considered all responses received to the consultation, as detailed in the summary of responses published on 6 December 2011.
The option is available for deaths on or after 6 April 2012.
On death, IHT is charged on estates where the net value is more than the IHT threshold or ‘nil-rate band’ (currently £325,000 but the amount available for use by an estate can be different in some circumstances).
A person’s estate for IHT purposes includes not only the assets that they directly owned immediately before their death and which they are able to dispose of under the terms of their will (their ‘free estate’) but also certain other assets and property. These include jointly owned assets which pass automatically to the surviving joint owner, interests in certain types of trust (settled property), and some other assets which the individual gave away during their lifetime whilst continuing to derive a benefit (gifts with reservation of benefit). All these different categories of asset combine to form an aggregate estate that is subject to IHT.
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Main Deed of Variation page.