HMRC reveals how to reduce inheritance tax rate
HM Revenue & Customs explains how new rules reducing the rate of inheritance tax that estates can pay will work.
From Friday (6 April) if 10 per cent of your estate is left to charity the tax due may be paid at a reduced rate of 36 per cent instead of 40 per cent.
On Friday, HMRC explained in order to qualify for a reduced rate of inheritance tax you must leave at least 10 per cent of the net value of your estate to a qualifying charity.
The net value of your estate is the sum of all the assets after deducting any debts, liabilities, reliefs, exemptions and the nil-rate band.
As explained in FTAdviser’s Regulation Tracker, a qualifying charity is an organisation that is recognised as a charity for tax purposes by HM Revenue & Customs (HMRC).
The status can be checked by asking the charity to confirm it has an HMRC charity reference number.
According to HMRC, to see how much you need to leave to charity to qualify or whether your estate can pay a reduced rate of inheritance tax because of a charitable donation left in a will, you have to work out the value of each of the separate parts of an estate.
These are known as components.
According to HMRC, it is possible that one part of your estate may pay inheritance tax at 36 per cent and another could pay tax at the full rate of 40 per cent.
The estate and assets are broken down by HMRC into three components as follows:
* assets that you own jointly with someone else that pass by ‘survivorship’;
* assets in trust; and
* assets that you own outright or as tenants in common with someone else.
HMRC revealed it is possible to merge one or more 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.
If assets have not been left to a qualifying charity or if the donation in a will does not pass the 10 per cent test when someone die, the beneficiaries of the estate can arrange an instrument of variation to make or increase a donation to charity.
Doing so may mean that the estate can then qualify to pay inheritance tax at 36 per cent.
Assets passing by survivorship will only qualify for tax to be paid at 36 per cent if they are merged with another component or if they are included in an instrument of variation.
However this does not apply to those who benefit from a trust.
It is not possible to vary the destination of trust assets by an instrument of variation, HMRC stated.