36% IHT rate

aroominyork

Please could someone check if these calculations are correct about reducing IHT to 36% when leaving 10% of a net estate to charity. 

1) No gift to charity

Gross estate £1,200,000

Less NRB and RNRB (£500,000)

Net taxable estate £700,000

IHT at 40% £280,000

Amount to legatees £920,000 

2) 10% gift to charity

Gross estate £1,200,000

Less NRB and RNRB (£500,000)

Net estate £700,000

Gift to charity £70,000

Net taxable estate £630,000

IHT at 36% £226,800

Amount to legatees £903,200 

This would mean that (£920,000 - £903,200) / £70,000 = 24% of the gift comes from reduced inheritance to legatees and 76% from less tax.

Keep_pedalling

Unfortunately no, to get the reduction the gift to charity would need to be £120k, 10% estate. 

The net value of the estate is the gross value minus funeral costs and debts, not gross amount less IHT exemptions. 

DRS1

Shouldn't the amount to legatees be reduced by the gift to charity?

aroominyork

Keep_pedalling said:

Unfortunately no, to get the reduction the gift to charity would need to be £120k, 10% estate. 

The net value of the estate is the gross value minus funeral costs and debts, not gross amount less IHT exemptions. 

I thought so also, but it seems it is net chargeable estate. See the examples here which both show the beneficiaires forgoing 24% of the gift's value.

Albermarle

aroominyork said:

Keep_pedalling said:

Unfortunately no, to get the reduction the gift to charity would need to be £120k, 10% estate. 

The net value of the estate is the gross value minus funeral costs and debts, not gross amount less IHT exemptions. 

I thought so also, but it seems it is net chargeable estate. See the examples here which both show the beneficiaires forgoing 24% of the gift's value.

AIUI, you are correct .

How giving to charity can cut an Inheritance Tax bill

FrugaiMacDugal

So, be best to use a % figure rather than a £ amount?

Is it ok to give to charity when living if already used the £3000 gift allowance, suppose would need the charity number?

aroominyork

FrugaiMacDugal said:

So, be best to use a % figure rather than a £ amount?

My father's Will gave £ amounts which totalled between 9%-10% of his net estate. We got a Deed of Variation to increase it to 10%; that benefitted the charities and us kids. I think 10% of net estate is a good way to do it; if you are worried you might end up spending more than you expect during your lifetime and would not leave your heirs as much as you want to, I guess your Will could say that certain clauses (the charity ones) are only effective if your estate is worth over £xxxxx.

FrugaiMacDugal said:

Is it ok to give to charity when living if already used the £3000 gift allowance, suppose would need the charity number?

Are you asking whether lifetime gifts would count towards the 10% for IHT purposes? No, they wouldn't. 

Albermarle

FrugaiMacDugal said:

So, be best to use a % figure rather than a £ amount?

Is it ok to give to charity when living if already used the £3000 gift allowance, suppose would need the charity number?

It seems to be recommended to word your will in a certain way to make sure things happens in the way you want them to happen. However the example I saw was very much in legalese, so I will not attempt to repeat it.

Whilst alive you can give what you want to a registered charity, without any IHT implications.
So if you give to charity whilst alive, that reduces the size of your estate. No 7 year rule applies.
Then if you leave at least 10% of your net estate in your will to a registered charity, that reduces your estate further and reduces the 40% tax to 36%  on the rest of the net estate.

DRS1

FrugaiMacDugal said:

So, be best to use a % figure rather than a £ amount?

Is it ok to give to charity when living if already used the £3000 gift allowance, suppose would need the charity number?

If leaving a legacy it is best to use a £ amount.  If you use a % then you can imagine all sorts of arguments about the valuation of the estate.

If you give the residue of the estate to a number of charities then a % would be fine - eg half to Oxfam and half to The Red Cross.

aroominyork

What arguments? It is factual. Are you thinking of situations where a solicitor is not used?

DRS1

aroominyork said:

What arguments? It is factual. Are you thinking of situations where a solicitor is not used?

So how much do you value your Tiffany lampshade at?  Or your collection of old suits of armour?  Or your index linked gilts? or the hoard of gold sovereigns you hid under the floor boards?  or for that matter your house which has been stuck on the market for 12 months after your death?