Introduction Background Note
23.On death, inheritance tax (IHT) is charged on estates whose net taxable value (after deducting various reliefs and exemptions) is more than the IHT threshold, or nil-rate band. IHT is currently charged at a single rate of 40 per cent on the net taxable value of the estate above the available nil-rate band.
24.The value of an estate for IHT purposes can include not only the assets that the deceased owned immediately before death and is free to dispose of by will (the free estate), but also other assets and property such as interests in jointly owned assets which pass automatically by survivorship on death, interests in certain trusts, and assets given away but from which the deceased continued to benefit. The various categories of assets are combined to form an aggregate estate that is subject to IHT.
25.As an incentive to encourage charitable giving and support philanthropy, where 10 per cent or more of the deceased’s net estate (after deducting exemptions, reliefs and the available nil-rate band) has been left to charity, the taxable estate will be charged at a lower rate of IHT of 36 per cent. The change will apply for deaths on or after 6 April 2012.
26.The total amount left to charity will be compared to the 10 per cent threshold or ‘baseline’ amount to see if the estate qualifies for the lower IHT rate. For the purposes of this ‘10 per cent test’ the baseline will be the value of the estate charged to IHT after deducting all available reliefs, exemptions and nil-rate band but excluding the charitable legacy itself. If the estate qualifies, the lower rate will apply automatically but the personal representatives or other persons will be able to elect for the lower rate not to apply.
27.For estates which include additional assets to those that the deceased owned before death, the estate will be divided into up to three parts or ‘components’. The 10 per cent test will be applied to each component separately and the lower rate will apply to those components that pass the test unless an election is made to opt out.
28.Where a charitable legacy from one or more components of the estate exceeds the 10 per cent minimum it will be possible, by election, to combine components and apply the 10 per cent test to the aggregate. Where the aggregate components meet the test, the lower rate will apply to the merged components. This will enable the benefit from charitable legacies of more than 10 per cent to be spread to other parts of the estate.