Examples of Calculating Reduced Rate IHT
Gifts to the Merchant Taylors' School Charitable Fund are exempt from Inheritance Tax (IHT) in the UK, and now there is a further incentive when you leave 10% or more of your net estate to charity. If you leave combined charitable gifts in your Will that amount to 10% or more of your chargeable net estate, the IHT rate on the whole of your estate will be reduced from 40% to 36%. Below are examples of how this would work in practice.
Example One (for a gross estate of £500,000)
|
| Without a charitable bequest |
|
With a 10% charitable bequest |
|
| Gross estate |
£500,000 |
Gross Estate |
£500,000 |
| Less nil band |
-£325,000 |
Less nil band |
-£325,000 |
| Net estate |
£175,000 |
Net estate |
£175,000 |
| No charitable donation |
£0 |
Less bequest of 10% |
-£17,500 |
| Taxable estate |
£175,000 |
Taxable estate |
£157,500 |
| Less IHT at 40% |
-£75,000 |
Less IHT at 36% |
-£56,700 |
| Remaining estate (incl. nil rate band) |
£430,000 |
Remaining estate (incl. nil rate band) |
£425,800 |
Therefore the estate's beneficiaries would forego the sum of: £4,200
But the charity (or charities) would benefit from a total of: £17,500
Example Two (for a gross estate of £1,000,000)
|
| Without a charitable bequest |
|
With a 10% charitable bequest |
|
| Gross estate |
£1,000,000 |
Gross Estate |
£1,000,000 |
| Less nil band |
-£325,000 |
Less nil band |
-£325,000 |
| Net estate |
£675,000 |
Net estate |
£675,000 |
| No charitable donation |
£0 |
Less bequest of 10% |
-£67,500 |
| Taxable estate |
£675,000 |
Taxable estate |
£607,500 |
| Less IHT at 40% |
-£270,000 |
Less IHT at 36% |
-£218,700 |
| Remaining estate (incl. nil rate band) |
£730,000 |
Remaining estate (incl. nil rate band) |
£713,800 |
Therefore the estate's beneficiaries would forego the sum of: £16,200
But the charity (or charities) would benefit from a total of: £67,500
For further examples of calculating reduced rate IHT, click here.
For sample wording to ensure a legacy meets the 10% test, please click here.
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