IHT changes are a ‘lost opportunity’, Boodle Hatfield

The government has today (6 December) published draft legislation that will introduce a new reduced rate of inheritance tax for those who give 10 per cent or more of their estate to charity.

The legislation, which will come into effect on 6 April 2012, will introduce a new 36 per cent rate of inheritance tax for estates where 10 per cent of the net estate passes to charity.

Today’s announcement also confirmed that the reduced rate will extend to assets outside the core part of a person’s estate which are taxable on death - such as jointly owned property and certain trust assets - if 10 per cent of those components passes to charity.

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The measure is designed to encourage greater levels of giving but is only likely to appeal to just three per cent of estates, claimed law firm Boodle Hatfield. The government’s own forecast is that only 50 estates will benefit next year.

Fiona Graham, a partner in the private client and tax team at Boodle Hatfield, said: “This is an ‘all or nothing’ relief.

If the charitable giving is less than 10 per cent of the estate, the usual 40 per cent rate will apply. If the government was serious in its efforts to raise the levels of charitable giving it would have been better to introduce a ‘pound-for-pound’ relief, rather than this 10 per cent flat rate.”

For those who wish to benefit from this relief, Boodle Hatfield highlights that it will be important to ensure that the 10 per cent level is reached. Ms Graham recommends that the wording of wills be changed to include a formula clause to ensure this qualifying point is met.

Ms Graham said: “Such a clause could be based around the following wording: ‘I give to charity X the relevant sum that can be given to qualify for this relief…’. It is however always important to seek advice to ensure that wording is correct and your wishes are properly recorded.”

“The legislation also provides the ability where an estate fails to meet the 10 per cent requirement to correct the position post-death in a two year window. This will not however be possible in all cases, for example where beneficiaries are minors.

“This relief will be welcomed by a small number of estates, but whether it achieves what the government intends – greater levels of charity giving – remains to be seen.”