36% IHT rate

aroominyork

For IHT purposes they have to be valued appropriately. Doesn't everything else flow from that?

DRS1

aroominyork said:

For IHT purposes they have to be valued appropriately. Doesn't everything else flow from that?

But this isn't for IHT purposes it's for determining how much the charity actually gets.  And a valuation is just someone's opinion not a fact.

ukdw

Interesting to see the calculation laid out like that.

I guess anyone receiving a legacy where IHT is involved could decide to gift some of it to charity via a deed of variation- and in some cases like the example quoted be able to effectively multiply the benefit to the charity by over 4x.

aroominyork

There is a calculator for the reduced IHT rate at https://www.gov.uk/inheritance-tax-reduced-rate-calculator

fuzzzzy

aroominyork said:

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

Other threads touch on this topic. For example

https://forums.moneysavingexpert.com/discussion/6516542/leaving-percentage-of-estate-to-registered-charities-vs-lump-sums

probate_slave

aroominyork said:

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

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 

No, the residential NRB can't be used to reduce the baseline amount (see note 4 of IHT430). However, the transferable NRB can. The OP has said elsewhere that the two wills leave everything to the surviving spouse and then to the children. So if the charitable gift is made on the second death, and assuming that the first NRB transfers in full, the figures should look more like this:

1) No gift to charity
Gross estate £1,200,000
Chargeable estate 1,200k - (650k + 350k) = £200,000
IHT at 40% = £80,000
Amount to legatees 1,200k - 80k = £1,120,000

2) 10% gift to charity
Gross estate £1,200,000
Baseline for reduced rate 1,200k - 650k = £550,000
Gift to charity £55,000
Chargeable estate 1,200k - (650k + 350k + 55k) = £145,000
IHT at 36% = £52,200
Amount to legatees 1,200k - 52.2k - 55k = £1,092,800

In this case 49.5% of the charity gift comes from reduced inheritance to legatees, not quite such a great deal.

aroominyork

Many thanks indeed, probate_slave. Looking also at lifetime gifts, would anything gifted by the testator during the last seven years be treated the same way (presumably irrespective of whether one year or six years ago)? Is the following correct:

1) No gift to charity
Gross estate £1,200,000

Lifetime gift £50,000
Chargeable estate 1,200k + £50k - (650k + 350k) = £250,000
IHT at 40% = £100,000 (plus taper relief)
Amount to legatees 1,200k - 100k = £1,100,000 (plus taper relief)

2) 10% gift to charity
Gross estate £1,200,000

Lifetime gift £50,000
Baseline for reduced rate 1,200k + £50k - 650k = £600,000
Gift to charity £60,000
Chargeable estate 1,200k + £50k - (650k + 350k + 60k) = £190,000
IHT at 36% = £68,400 (plus taper relief)
Amount to legatees 1,200k – 68.4k - 60k = £1,071,600 (plus taper relief). 

In this case £28,400 of the £60,000 charity gift comes from reduced gift to legatees, ie 47.3%. This is lower than 49.5% in your example so let’s see whether the percentage ‘cost to legatees’ falls with larger gifts. 

1) No gift to charity
Gross estate £1,200,000

Lifetime gift £100,000
Chargeable estate 1,200k + £100k - (650k + 350k) = £300,000
IHT at 40% = £120,000 (plus taper relief)
Amount to legatees 1,200k - 120k = £1,080,000 (plus taper relief)

2) 10% gift to charity
Gross estate £1,200,000

Lifetime gift £100,000
Baseline for reduced rate 1,200k + £100k - 650k = £650,000
Gift to charity £65,000
Chargeable estate 1,200k + £100k - (650k + 350k + 65k) = £235,000
IHT at 36% = £84,600 (plus taper relief)
Amount to legatees 1,200k - 84.6k - 65k = £1,050,400 (plus taper relief). 

In this case £29,600 of the £65,000 charity gift comes from reduced gift to legatees, ie 45.5%.

 So as lifetime gifts increase:

-          The amount gifted to charity to access 36% IHT increases

-          The Sterling cost to legatees to access 36% IHT increases

-          The % cost to legatees to access 36% IHT decreases

probate_slave

Yes, I broadly agree with your figures (though there's a typo in one line near the end). I would just add:

1) Taper relief (on the second death) would only apply to the excess of £650k of lifetime gifts, so unlikely to be available.
2) It makes no difference whether the lifetime gifts have been made by the first or second spouse to die.
3) For the figures to be comparable, you should reduce the gross estate by the lifetime gift in each example, eg gross estate = £1.1m in the final case.
4) Try exploring the outcome of making the equivalent charitable donation a lifetime one. You forgo the reduced rate but the charity potentially benefits from Gift Aid, while the result for legatees is neutral.

Albermarle

Just to reinforce one of the comments above, as it is a common misunderstanding.
Taper relief only applies on very large gifts that exceed the nil rate band.

As a simple example - A Single person dies, just with the £325 K nil rate band.
If they gave away say £100K 6 years before dying, the full £100K is counted back into the estate.

However if they gave away say £450K, 6 years before dying. £325K would be counted back into the estate and £125K would benefit from taper relief. 

aroominyork

1. Where's the typo please? 

2. Are you saying if the first spouse has made lifetime gifts in the seven years before death, those gifts are added to the second spouse's baseline irrespective of how long the second spouse survives the first?

3. Yes, and that brings everything back to 49.5% because the charity gift by will is now always the same! See spreadsheet below.

4. We are entering retirement so won't pay enough tax to make much GA claimable.