Reduce Inheritance Tax by Donating to Charity

Photo by Grone on Unsplash

The usual Inheritance Tax rate is 40%, but this can be reduced to 36% on certain parts of the estate if 10% or more of its net value is given to charity.

The net value of an estate is the total value of its assets (gross value) after deducting the following:

• Debts and liabilities
• Inheritance tax reliefs
• Exemptions such as assets left to a married or civil partner
• All items below the Inheritance Tax threshold (called “nil rate band”) of £325,000

Inheritance Tax does not apply on gifts by the estate to charities, universities, museums or community amateur sports clubs.

What charities give a reduced rate to the Inheritance tax?

To get an Inheritance Tax reduction, at least 10% of the estate’s net value must be left to one or both of the following:

• Community amateur sports clubs (CASCs)
• Charities which are registered and have a reference number with an HM Revenue and Customs (HMRC)

Find out if the estate qualifies for a reduced rate

You can use the reduced rate calculator to see if the estate qualifies for a reduced Inheritance Tax rate or not.

You will have to calculate the value of the “components” (the different parts of the estate). However, not all components qualify for a reduction, so the full rate will be charged. There is also the possibility that some of the components will need to be “merged” (added to other components) to qualify for the reduced rate.

When do components need to be merged?

The following components of the estate do not need to be merged:

• General components. If assets or shares of your loved one were owned jointly and left to others on their will.
• Settled components. If your loved one was a beneficiary of a trust and left assets in them.

These following components are only eligible for a reduced Inheritance Tax rate if they are merged with other components that qualify for reduction:

• Gifts with reservation of benefit. When your loved one has given someone a gift but still benefited from it while they were alive
• Survivorship component. When jointly-owned assets of your loved one are passed automatically to the other owners after the death

It is important to have in mind that it is possible for jointly-owned assets to not automatically pass to the other owners by changing the will after the death.

How do I claim the reduced Inheritance Tax rate?

If you are the executor or administrator of the estate you will have to fill in the form IHT430 to claim the Inheritance Tax reduction. This document will have to be sent to the HMRC along with the IHT400 form when applying for probate, known as “grant of representation” (called “confirmation” in Scotland).

Choosing not to pay the reduced rate

The executor of a will or administrator of an estate has the option to choose to still pay the full 40% Inheritance Tax rate if the beneficiaries agree.

Opting out of paying the reduced rate might make things easier when dealing with the estate as, for example, there are situations when paying for someone to professionally value the assets will cost more than paying the normal tax rate.