The gift that pays for itself

Shelley Faulkner, Solicitor at AMD Solicitors, Bristol

How leaving money to charity can save you Inheritance Tax

By Shelley Faulkner, Solicitor with AMD Solicitors

While most of us support a number of charities in our lifetime, it is perhaps not surprising that a smaller number choose to remember a charity in their Will.  Clearly the priority for most is to provide for a surviving spouse or children, or to ensure that the family wealth can be passed on to benefit the next generation.

However, government policy is clearly to encourage giving to charity, and a recent development in the law is intended to promote gifts to charity being made by Will.  This change may also, on occasion, serve to save Inheritance Tax, or even to create a gift which literally pays for itself.

Reduced rate of Inheritance Tax

Where somebody dies after 6 April 2012 the rate of Inheritance Tax applied to the estate can be reduced from 40 % to 36 % (in other words by 10 %), provided that at least 10 % of the estate passes to charity.

Clearly it is not possible to determine in advance exactly what values the assets you leave by Will will have on your death for Inheritance Tax purposes, or what 10 % of those values will be.  However a Will can be worded to provide that a gift which is ‘a sum equal to 10 %’ of the value of the estate is given to a charity of your choice.  The effect of this will be that the rate of Inheritance Tax payable on the whole estate is reduced from 40 % to 36 %.

In same circumstances, it has been calculated that this reduction in the tax bill can serve to leave the estate, even after payment of the gift to charity, with a value as high as if the gift had not been made.  Thus the gift can in some cases quite literally pay for itself.

Even where a Will has not been prepared in these terms, it may be possible to take advantage of this tax break.  If the beneficiaries of the estate agree, it is possible to effectively amend the terms of a Will within two years of the date of death.  A ‘Deed of Variation’ can be drawn up which sets out the family members’ agreed arrangements for the distribution of the estate, and the estate can then be divided as if the Will had been made in these terms.  A Deed of Variation could provide that 10 % of the estate is to pass to a chosen charity or charities, making the estate as a whole eligible for the reduced rate of Inheritance Tax.

This change in the law is clearly very good news both for charities, and potentially for some estates as well.  However the detail of the application can be complex.  For example, the estate is divided into different ‘components’ depending on how the property will pass to the beneficiaries, in order to calculate whether the 10 % test has been met.  Taking specialist advice on the implications for your particular circumstances is essential.

AMD’s team of experienced private client solicitors and practitioners includes full members of the Society of Trust and Estate Practitioners, the leading professional body in this field.  We offer a free initial consultation for new clients.

For advice on administration of estates, trusts, wills, powers of attorney and all private client issues, contact Shelley Faulkner, Florence Pearce and the other members of the team on 0117 9621205, email probate@amdsolicitors.com or call in at 15 The Mall Clifton, or 100 Henleaze Road Henleaze.

 

AMD Solicitors takes pride in sponsoring local, Bristol based charities and this year is very pleased to be supporting the Bristol branch of the Alzheimer’s Society, the local branch of this national charity which works to improve the quality of life of people affected by dementia in Great Britain.  For full details of our fundraising activities visit our website www.amdsolicitors.com.

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