Giving to charity

A n estate can pay Inheritance Tax at a reduced rate of 36% on some assets (instead of 40%) if 10% or more of the ‘net value’ of their estate is left to charity.

The net value of an estate is the total value of all the assets after deducting:

• Debts and liabilities
• Reliefs
• Exemptions, for example, anything left to a husband, wife or civil partner
• Anything below the IHT threshold of £325,000 (the nil rate band)

An estate doesn’t have to pay IHT on any gifts given to charities, museums, universities or community amateur
sports clubs.

Which charities you can leave assets to

To pay the reduced rate, the assets must be left to:

• Charities with an HM Revenue
and Customs (HMRC) charity
reference number
• Community amateur sports clubs (CASCs)
Writing a Will
You can write a clause into your Will to make sure that you’ll leave 10% of your estate to charity.

Change a Will
The beneficiaries of an estate can change the Will to make or increase a donation to a charity so the estate meets the 10% test.

Opt out of paying the reduced rate
If you’re the executor of a Will or administrator of an estate, you can choose to pay IHT at 40% rather than the reduced rate – if the beneficiaries agree.

This can make it easier to deal with the estate, for example, if the cost of getting some of the assets professionally valued would outweigh the benefits of paying the reduced rate.

Living outside the UK

When someone living abroad dies, the rules for paying Inheritance Tax usually depend on:

• How long they lived abroad
• Whether their assets (property,
money and possessions) are in the UK or abroad
• If their assets in the UK are
‘excluded assets’
• If their assets were put into a trust

How long the deceased lived abroad

For IHT purposes, HM Revenue and Customs (HMRC) can treat someone who had their permanent home (‘domicile’) abroad as if it was in the UK (known as ‘deemed domicile’) if they had either:

• Had their permanent home in the UK
at any time in the three years before they died
• Been resident in the UK for at least
17 of the 20 Income Tax years up to their death

If the deceased is deemed domiciled in the UK, their estate has to pay UK IHT on all their assets.
If they aren’t deemed domiciled, their estate:

• Has to pay IHT on their assets (except excluded assets) in the UK
• Won’t have to pay UK IHT on their assets outside the UK

HMRC only recognises a change of domicile if there’s strong evidence that someone has permanently left the UK and intends to live abroad indefinitely.

UK assets you don’t pay Inheritance Tax on
The estate doesn’t have to pay IHT on some assets in the UK if the deceased was domiciled abroad. These are known as ‘excluded assets’. They include:

• Holdings in authorised unit trusts
and open-ended investment
companies (OEICs)
• Foreign currency accounts with a bank or the Post Office
• UK government gilts which were issued ‘free of tax to residents abroad’
• Overseas pensions
• Pay and possessions of members of visiting armed forces and staff of
allied headquarters
Government gilts

There’s no IHT payable on government gilts issued:

• Before 30 April 1996 – and the deceased wasn’t deemed domiciled or resident in the UK
• On or after 30 April 1996 – and the deceased wasn’t resident in the UK

Channel Islands and Isle of Man
National Savings Certificates or certain other forms of small savings are excluded from IHT if the deceased was domiciled (not deemed domiciled) in the Channel Islands or the Isle of Man.

Double-taxation treaties
You may be able to avoid or reclaim tax through a double-taxation treaty if IHT is charged on the same assets by the UK and the country where the deceased lived.

There are different rules if the deceased put assets outside the UK into a trust while they were domiciled in the UK.

A Will is the first step

Planning your finances in advance should help you ensure that when you die, everything you own goes where you want it to. Making a Will is the first step in ensuring that your estate is shared out exactly as you want it to be.

If you don’t make a Will, there are rules for sharing out your estate called the ‘Law of Intestacy’, which could mean your money going to family members who may not need it, with your unmarried partner or a partner with whom you are not in a registered civil partnership receiving nothing at all.

If you leave everything to your spouse or registered civil partner, there’ll be no Inheritance Tax to pay because they are classed as an exempt beneficiary. Or you may decide to use your tax-free allowance to give some of your estate to someone else, or to a family trust.

Good reasons to make a Will

A Will sets out who is to benefit from your property and possessions (your estate) after your death. There are many good reasons to make a Will:

• You can decide how your assets are shared – if you don’t have a Will, the law says who gets what
• If you’re an unmarried couple (whether or not it’s a same-sex relationship),
you can make sure your partner is provided for
• If you’re divorced, you can decide whether to leave anything to your former partner
• You can make sure you don’t pay more Inheritance Tax than necessary

Before you write a Will, it’s a good idea to think about what you want included in it.

You should consider:

• How much money and what property and possessions you have
• Who do you want to benefit – your spouse or partner, children or other friends and relations? They become known as the beneficiaries who should look after any children under 18 years of age
• How much do you want to give them? You can either give a named legacy – such as a family heirloom or treasured item – or a monetary gift
• How do you own your home? If you own it as ‘tenants in common’ with your spouse or partner, then you each own a percentage that can be left to another person on death. Owning a property as ‘joint tenants’ means that you both own 100% and it solely belongs to the other on your death. Different property ownership rules apply in Scotland
• Who do you want to look after any of your children under the age of 18
when you die? They will become their legal guardians
• Who do you want to administer your
Will when you die? They’re called
‘executors’, and their tasks include collecting in any outstanding debts to your estate, paying off any loans and IHT due, and then paying out what is left according to your wishes. Many couples name their partner as executor, but it could be worth choosing a second one in case you should both die at the same time
• Do you want to put your money into trust when you die to provide an income and capital for your dependants? If you
do, consider getting professional financial advice about the best trust to use
• Who will look after the trust? A trustee can either be a family member or friend, or a professional such as a solicitor

Passing on your estate
An executor is the person responsible for passing on your estate. You can appoint an executor by naming them in your Will. The courts can also appoint other people to be responsible for doing this job.

Once you’ve made your Will, it is important to keep it in a safe place and tell your executor, close friend or relative where it is.

It is advisable to review your Will every five years and after any major change in your life, such as getting separated, married or divorced, having a child, or moving house. Any change must be by codicil (an addition, amendment or supplement to a Will) or by making a new Will.

Scottish law on inheritance differs from English law.