From April 2012, estates qualify for a reduced rate of inheritance tax on the whole estate if 10% of the estate (excluding the inheritance tax nil rate band) is left to charity.
The normal 40% inheritance tax charge is reduced to 36% on the basis that the estate qualifies for the reduced rate.
Many wills were drafted before this new rule was introduced. The introduction of this new rule has created an interesting situation whereby it is financially in a beneficiary’s and a charity’s interests for a will to be varied after death if it currently leaves anything between 4% and 10% to a charity.
Take this example below:
Mr A. dies leaving an estate worth £1 million. He has no inheritance tax nil rate band available. In his will, his son, Mr B. is left 94% of the estate and Charity C is left 6%.
Currently, the tax payable by the estate is £376,000, meaning B inherits £564,000 and the charity receives £60,000.
Mr B. has the option to draw up a Deed of Variation within two years of A’s death to alter the distribution of the will. If he decides to do this it varies the estate so that his share of the estate is reduced to 90% and the Charity’s is increased to 10%, on the face of it, it appears that B is losing out by doing this variation as he is giving up 4% of his legacy. However, as you will see from the tax calculation, the opposite is true.
As 10% of the estate is now being left to charity, the estate pays a reduced rate of tax of 36%.
The tax payable by the estate is reduced to £324,000 as a result of the variation.
The charity now receives £100,000, an increase of £40,000 and B now receives £576,000, an increase of £12,000.
As you see, B and C have both increased the amounts they receive at the expense of the Inland Revenue!
If you want to review your will in light of this or wish to discuss any other estate planning matter in more detail, please contact Ben Jones on 01923 650850.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.