Charitable bequest

shedboy52

i hope someone can help me.

i am settling an estate and need help on IHT and charitable bequests.

The estate is liable to IHT before charitable bequests and the charitable bequests are a percentage of the estate. So I have a chicken and egg situation. The value of charitable bequests is dependent on the IHT payable and the IHT is dependent on the charitable bequests. 

Is there an easy solution or do I have to keep recalculating until I get an answer.

thanks for any help

pphillips

You first need to identify the taxable death estate and then deduct funeral costs, liabilities, bequests to exempt beneficiaries (spouses and charities), the relevant NRB's and calculate IHT after the deductions.

Keep_pedalling

The percentage payable to the charities is on the the value of the estate before deduction of IHT.

Brynsam

Keep_pedalling said:

The percentage payable to the charities is on the the value of the estate before deduction of IHT.

Just to expand slightly - bequests to charities are free of IHT. If more than 10% of the value of the estate is being given to charity, then any IHT payable on the rest of the estate is at a lower rate (36% instead of 40%). More info: https://www.gov.uk/donating-to-charity/leaving-gifts-to-charity-in-your-will

Uxb1

I had this as an executor a while back
There is a way of dealing with this because as you say the calculation is recursive as one affects the other
I worked it out properly using a spreadsheet to manually vary the amounts given to the charity with other residual beneficiaries percentages until it all balanced out and everyone's % of the final estate was right at the reduced IHT 36% rate calculation and the amount resulting to the charity tax free was also was right.

That said I needed not have bothered...

My solicitor who was dealing with the legal side told me that HMRC has a method of working this out to get to a final answer which approximates to what the real answer should be without going round and round and HMRC  takes this as definitive how" much you need to pay" - which as I recall ends up that less IHT than strictly might be calculated by the full recursive calculation was needed to be paid.
Sorry cannot be of much more help as to how this was done on what form as I was using a solicitor to handle the complex bits - always wise when charities getting a % of the residue are involved as there is less scope for the charity to get arrsy about things - and the more they do the more it costs and the less they get as a solicitor unlike an executor can deduct their waste of time dealing with the charity from the estate - It gets the message across pronto!

shedboy52

I was going to do the same and had hoped there may have been a simple solution. It seems there is... I’ll try the taxman. Many thanks

naedanger

shedboy52 said:

I was going to do the same and had hoped there may have been a simple solution. It seems there is... I’ll try the taxman. Many thanks

How is the charitable donation expressed in the will?

Is it as a percentage of the net estate (in which case I think the calculation is straightforward) or as a percentage of the net estate after inheritance tax (in which case the calculation is a bit harder)?

Does the following formula work (I am not certain I am understanding the IHT rules):

Let x = IHT rate i.e. either 36% or 40%
Let y = charity donation percentage
If the charitable donation is expressed as a percentage of the net estate then 
IHT = x * (Net Estate - IHT Threshold - y * Net Estate)       [So quite straightforward]
If the charitable donation is expressed as a percentage of the net estate after inheritance tax then 
IHT = x * (Net Estate - IHT Threshold - y * Net Estate) / (1 - x * y)

Example
Net Estate = £1,000,000
IHT Threshold = £300,000 (e.g. because of gifts prior to death)
Percentage of estate to be given to charity = 20% of net estate after IHT
IHT tax  = 36% (bit of a guess - it might be 40% - check at end of calculation)
IHT = 0.36 * ( 1,000,000 - 300,000 - 0.2 * 1,000,000) / (1 - 0.36 * 0.2) = £193,965.52
Check: Charity Donation = 0.2 * (1,000,000 - 193,965.52)) = £161,206.90
IHT check = 0.36 * (1,000,000 - 300,000 - 161,206.9) = £193,965.52
Note the charity donation is > 10% of net estate so 36% was correct tax rate. If having done the calculation the charity donation was less than 10% of the net estate then the calculations would have had to be redone using an IHT rate of 40%.

NB NOTE the more complicated formula only applies if the charitable bequest is expressed as a percentage of the net estate after inheritance tax, which I am guessing for earlier responses is unusual. 

shedboy52

naedanger said:

shedboy52 said:

I was going to do the same and had hoped there may have been a simple solution. It seems there is... I’ll try the taxman. Many thanks

How is the charitable donation expressed in the will?

Is it as a percentage of the net estate (in which case I think the calculation is straightforward) or as a percentage of the net estate after inheritance tax (in which case the calculation is a bit harder)?

Does the following formula work (I am not certain I am understanding the IHT rules):

Let x = IHT rate i.e. either 36% or 40%
Let y = charity donation percentage
If the charitable donation is expressed as a percentage of the net estate then 
IHT = x * (Net Estate - IHT Threshold - y * Net Estate)       [So quite straightforward]
If the charitable donation is expressed as a percentage of the net estate after inheritance tax then 
IHT = x * (Net Estate - IHT Threshold - y * Net Estate) / (1 - x * y)

Example
Net Estate = £1,000,000
IHT Threshold = £300,000 (e.g. because of gifts prior to death)
Percentage of estate to be given to charity = 20% of net estate after IHT
IHT tax  = 36% (bit of a guess - it might be 40% - check at end of calculation)
IHT = 0.36 * ( 1,000,000 - 300,000 - 0.2 * 1,000,000) / (1 - 0.36 * 0.2) = £193,965.52
Check: Charity Donation = 0.2 * (1,000,000 - 193,965.52)) = £161,206.90
IHT check = 0.36 * (1,000,000 - 300,000 - 161,206.9) = £193,965.52
Note the charity donation is > 10% of net estate so 36% was correct tax rate. If having done the calculation the charity donation was less than 10% of the net estate then the calculations would have had to be redone using an IHT rate of 40%.

NB NOTE the more complicated formula only applies if the charitable bequest is expressed as a percentage of the net estate after inheritance tax, which I am guessing for earlier responses is unusual. 

The will has only been discussed with me so I have not seen it. However I have been told that the estate after IHT is to be split to various charities and relations on a percentage basis. So the "complicated formula is my answer".....MANY MANY THANKS FOR IT!!!!

weezie7

I am Executor of a will. I have a Grant of Probate which indicates both the Gross and Net worth of the estate. It is under the IHT threshold. How do I work out the percentages for legacies to charities, is it on the Gross or Net value of the estate as specified in the Grant of Probate? Many thanks.

Marcon

weezie7 said:

I am Executor of a will. I have a Grant of Probate which indicates both the Gross and Net worth of the estate. It is under the IHT threshold. How do I work out the percentages for legacies to charities, is it on the Gross or Net value of the estate as specified in the Grant of Probate? Many thanks.

Depends what the will says on the matter - and hopefully it says something, although I doubt you'd be asking the question if it does... Otherwise, this gives an excellent explanation of the problem:

https://www.vwv.co.uk/news-and-events/blog/charity-law-brief/will-to-calculate-inheritance-tax