Charitable Giving – Reducing Inheritance Tax by giving to UK Churches or UK Charities

From 6 April 2012, if you leave 10 per cent of your estate to charity the inheritance tax due on the rest of your estate may be paid at a reduced rate of 36% instead of 40%.

Gifts you make to a qualifying UK registered charity whether during your lifetime or in your Will are exempt from inheritance tax. This reduced rate of inheritance tax of 36% applies if you leave at least 10% of the net value of your estate to a qualifying charity. The net value of your estate is established after deducting all debts, liabilities, reliefs, exemptions and the nil-rate band from the total of your assets.

The composition of your assets and how they are owned is relevant and can affect the way they are treated for this reduced rate of inheritance tax. In order for you to ascertain how much you could bequeath to charity to qualify or whether your estate can pay the reduced rate of inheritance tax because of a charitable donation left in your Will, you have to work out the value of each of the components (types of assets and how they are held) within your estate. This is so, because it is possible that one component of your estate may pay Inheritance Tax at 36% and another pay tax at the full rate of 40%. The components are as follows:-

  • assets that you own jointly with someone else that pass by ‘survivorship’
  • assets in trust
  • assets that you own outright or as tenants in common with someone else

It is also possible to merge one or more of the components to gain the maximum benefit from the reduced rate. Assets that are classed as ‘gifts with reservation’ may also qualify to pay tax at the reduced rate, but only if they are merged with one or more of the three components of the estate. HMRC have provided key steps to assist someone in working out whether an estate passes the 10 per cent test. The steps are outlined below and explain how to work out the calculation.

Step 1 – work out which assets fall into each component – remember not all estates have all three components.
Step 2 – add up the assets then deduct any debts, liabilities, reliefs and exemptions that apply to each component.
Step 3 – apportion the inheritance tax nil rate band – including any transferable unused nil rate band from a previously deceased spouse or civil partner – between the number of components being used and any assets classed as ‘gifts with reservation’.
Step 4 – deduct the apportioned value of the nil rate band from each component.
Step 5 – add back in the value of the donation to charity – this result is the ‘baseline amount’ for each component.
Step 6 – divide the baseline amount by 10.
Step 7 – work out whether the charitable donation is more than the result of the sum at step 6.

In the event that this is an issue for you we can help and guide you if you are considering charitable gifting in your Will. We will need to have details of all your assets in order to do so. Our work in relation to this will be charged at the hourly rates of our staff working for you. We will assume this is not an issue for you unless you directly instruct us to consider this issue and give us the details of the value of all your assets so we are empowered to so assist.

Charitable Giving
« Back to Glossary Index