Inheritance Tax (IHT) is payable if a person’s Estate is valued over the current IHT threshold of £325,000. The tax is normally payable at 40% on the amount over this threshold. So, for example, if an estate is worth £1 million then the amount of IHT payable would be £270,000 (£1 million – £325,000 x 40%). In this example, the beneficiaries would receive the balance of £730,000 (ie £1 million – £270,000).
However, in the recent Budget, the Chancellor has announced a 10% cut in the IHT rate, from 40% to 36%, for those who leave at least 10% of their estate to charity. The new initiative, called “10 for 10”, will come into effect from April 2012.
Although this move will undoubtedly result in increased funds for charities, any family or friends who were due to benefit from such estates will inevitably lose some of their inheritance. For example, if an estate is worth £1 million and 10% of the estate above the £325,000 threshold is given to charity (ie £67,500) then the taxable estate will be £607,500 (£1 million – £325,000 – £67,500). This sum will then be taxed at 36% rather than 40%, giving rise to an IHT liability of £218,700, with only £713,800 passing to the non charity beneficiaries (ie £1 million – £67,500 – £218,700).
As the Chancellor told the Commons, “If you leave 10 per cent or more of your estate to charity, then the government will take 10 per cent off your IHT rate. Let’s be clear: no beneficiaries will be better off, just the charities to the tune of £300 million. I want to make giving 10 per cent of your legacy to charity the new norm in our country.”
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