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Giving to God's Kingdom Through your Estate - (Philanthropy)
Against a backdrop of tax cuts & austerity measures, there was good news given by the Chancellor in his announcement of a 10% reduction in Inheritance Tax where someone gives 10% or more of their estate to charity. This is due to come into effect from April 2012. This new relief will apply for deaths occurring on or after that date. Like many giving incentives, the benefits are to be shared between donor & receiver. The Chancellor in his budget speech made a bold statement: "I want to make giving 10% of your legacy to charity the new norm in our country" which would be fantastic, but sadly, I fear it is an unreal target.
We are still awaiting full clarity with regards to some important details of how this will work, and the Government will consult on the detailed implementation of the measure by issuing a consultation document before the summer. The full details will be in the Finance Bill of 2012 which is released in March of next year. However, I will make some assumptions based on the information we do know and give some examples below.
If a deceased leaves an estate worth £500,000 and we assume that they have the full Nil rate band (NRB) available of £325,000 and no spouses Nil rate band to carry forward, the table below shows the difference before and after the changes come into effect:
| Prior to 5.4.2012 | From 6.4.2012 | |
|---|---|---|
| Estate Value | £500,000 | £500,000 |
| Less NRB | £325,000 | £325,000 |
| Estate left | £175,000 | £175,000 |
| Gift to Charity (10% of £175,000) | £17,500 | £17,500 |
| Taxable Estate | £157,500 | £157,500 |
| Tax Charge Rate | 40% | 36% (40% - 10%) |
| Tax charge payable | £63,000 | £56,700 |
This shows an overall reduction in tax payable of £6,300
In a nutshell, the minimum amount of Charitable Gift required to receive a reduction in the tax charge is 10% of the taxable Estate having first deducted exemptions, reliefs and the nil-rate bands.
If you were married and on second death your estate was worth £500,000 and your spouse's NRB was unused and therefore still available, your situation would be completely different: The estate would have two NRB added together i.e. £325,000 x 2 = £650,000 meaning that there is no part of the estate chargeable to Inheritance tax. A gift can still be made to Charity but there are no taxable benefits. Therefore it would appear that it is those with larger estates who were already planning to make reasonable sized charitable bequeaths who may be encouraged to increase this up to 10% as there could be little or no loss to the beneficiaries.
As an example, a married couple with an estate of £1,500,000 who intend to give 10% away on second death. (10% x £1,500,000 = £150,000)
| Prior to 5.4.2012 | From 6.4.2012 | |
|---|---|---|
| Estate Value | £1,500,000 | £1,500,000 |
| Estate left | £850,000 | £850,000 |
| Gift to Charity | £150,000 | £150,000 |
| Taxable Estate | £700,000 | £700,000 |
| Tax Charge Rate | 40% | 36% (40% - 10%) |
| Tax charge payable | £280,000 | £252,000 |
This shows an overall reduction in tax payable of £28,000
From a Christian perspective the question should be "What is God calling us to give from our estate" as it all belongs to him anyway. Psalm 24:1 states that... 'The earth is the Lord's and everything in it, the world and all who live in it'. It is not the tax which should dictate the amount we give, but we should be good stewards of our resources and that includes making use of any tax breaks to maximise the effectiveness of our gift. Financial planning is crucial to this process as it incorporates giving alongside all other areas of our finances, and ensures efficient use of the resources God has blessed us with. Giving from your estate is a fantastic opportunity to give in a way that may not be possible in our own lifetime and allows us to leave a legacy that can make a big difference to the lives of others.
Finally I would like to point out that it is wise to review your giving from your estate now and to ensure you have an up to date Will in place rather than waiting for the new rules to be in place, just in case the will comes into effect before the new legislation does!
Editors note: Inheritance Tax planning is a complex business- why not look at the 'Find an Adviser' part of the ACFA website for a consultant near to your home.
Graham Cleveland is a past chairman of ACFA and is CEO of Trinity Wealth Management in St Albans.
May 2011
