Finance - Inheritance Tax in 2015
The Inheritance Tax Rate remains frozen at £325,000 and will not now increase until April 2018 at the earliest. Rates of tax remain unchanged at 40% (death transfers) and 20% (lifetime transfers). There is a reduced rate for an estate where a minimum level of legacy has been left by the deceased to charity. The actual legacy to charity remains exempt from IHT and it is the rate of tax on the balance of the estate that would be reduced to 36% from 40%.
The reduced rate will apply where charitable bequests satisfy a 10% test. A comparison will be made between the total value of charitable legacies for IHT purposes and the value of the net estate reduced by: any available nil rate band, the value of assets passing to the surviving spouse or civil partner and other IHT reliefs and exemptions for example Business Property Relief but excluding relief for the charitable donations.
If the first stage is at least 10% of the second then the balance of the estate will qualify for the reduced IHT rate of 36%. Special rules apply if the estate includes either a property which is jointly owned which passes automatically on death to the other joint owner(s) under survivorship rules (in England, Wales and Northern Ireland) or their local equivalent and settled property which forms part of the estate because the deceased held a qualifying interest in possession in the assets.
However, because the benefit of the reduced IHT rate will be dependent on whether or not the amount of the charitable legacy is sufficient for the estate to pass the 10% test there will be a ‘cliff edge’ effect. Where the amount of the charitable legacy is close to the critical 10% point a small difference to the amount of the legacy could have a much larger impact on the estate’s IHT liability. There are no plans to apply any taper or other mechanism to mitigate this. Always take professional advice before taking any action.
