Money Matters - Summer 2012

The rewards of philanthropy

Taxpayers can cut their tax bill even further by passing some of their wealth to charities or to the nation, as a result of two new provisions introduced by the Government.

medalsThe rate of inheritance tax (IHT) charged on an estate can now be reduced to 36% from the normal 40% where a person leaves at least 10% of their ‘net estate’ to a qualifying charity. The new rule applies to deaths after 5 April 2012. The net estate is the total assets after deducting IHT exemptions, reliefs and the nil-rate band of £325,000. The reduced rate of IHT will apply automatically if the 10% test is satisfied. However, personal representatives can elect for the reduced rate not to apply if the benefit is minimal.

It is important to take care where an estate consists of more than one ‘component’. This is because the 10% rule applies separately to each one. The three possible components are:

  • Assets owned jointly.
  • Assets in trust.
  • Assets owned outright or as tenants in common.

So one component of the estate could be subject to IHT at 36%, while another might be subject to the 40% rate.

The other new tax relief is for gifts of ‘pre-eminent’ objects to the nation. Land and buildings do not count as objects for this purpose. An object will be considered to be ‘pre-eminent’ if it is of particular historical, artistic, scientific or local significance or it is associated with a building in public ownership, which would include a National Trust property. Objects can be loaned or given to institutions such as charities, museums and galleries for safe keeping and to provide public access. In return donors will receive a reduction in their UK tax liabilities based on a percentage of the value of the object.

Experts will consider the offer and, if they determine that the object should be accepted, they will agree the value of the object with the donor. The donor will then receive a tax reduction based on the valuation if they decide to go ahead. The tax reduction for individuals could be income tax and/or capital gains tax, and for companies it will be corporation tax at a fixed percentage of the object's agreed value, which will be 30% for individuals and 20% for companies. Individuals will be able to spread the tax reduction forward across a period of up to five years.