For some years now a reduced rate of IHT (36%) has applied to estates where at least 10% of the chargeable estate is left to charity. What is perhaps less often considered is that the same relief can apply if the destination of an estate is altered by deed of variation.
Suppose, for example, that Tom and Harriet are the joint inheritors of their widowed mother’s estate which totals £3m. In the normal run of things the estate will pay tax of £940,000 (assuming a “doubled-up” nil rate band to be available) and the beneficiaries will each receive £1,030,000. They could, however, jointly agree to vary the disposition of the estate and give a minimum of 10% of the chargeable estate (so £235,000) to charity – perhaps a charitable trust set up in memory of their late parents. This would reduce the tax on the remainder of the estate to £761,400 so that Tom and Harriet would each receive £1,001,800. Bestowing a benefit of £235,000 on the charitable trust would thus have cost each of them just £28,200 – effectively giving tax relief at the rate of 76%. Or, to put it another way, the government tops up each £1 given by Tom and Harriet with a further £3.16. Subsidy of this kind may be a compelling reason to consider generosity to charity at a time of bereavement.
For more on wills, estates and variations, please get in touch with your usual BKL contact or use our enquiry form.