Tax break for philanthropy?

FENELLA MARTIN-REDMAN of Baker Tilly welcomes possible changes in Inheritance Tax, but warns of the risk of increased complexity

INHERITANCE Tax proves a burden for many families.

However, HM Revenue & Customs (HMRC) is considering a lower rate of Inheritance Tax (IHT) on the remainder of their estate for those who leave a charitable legacy of 10% or more.

If this is formalised, it will provide an extra incentive for people to use their estate to support worthy causes and is a step towards encouraging tax payers in philanthropy.

The proposed reduced rate is intended to be implemented on deaths on or after April 6, 2012 and comes at a time when charity funding is under pressure.


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The best outcome for both tax payers and charities would be to allow flexibility on applications, permitting all forms of legacy, not just assets, to be included in charitable giving and ensuring personal representatives are able to determine whether or not to disclaim the reduced rate where it is not cost effective.

The proposed incentive is more likely to increase planned charitable legacies that are already close to the 10% threshold than encourage new ones, but the potential impact is sufficient to justify the policy.

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Although the proposed lower rate will help families and individuals cope with the stress involved in the death of a loved one, it still seems many individuals do not take action to help minimise the effects of IHT on their estate on death, whilst others, unfortunately, take action which they believe may mitigate IHT but inadvertently gives rise to Income Tax or Capital Gains Tax charges.

However, there are a number of relatively straightforward and less contentious actions that can be taken to help reduce the IHT payable on the estate on death. For example:

n In some circumstances, taking out a life insurance policy to cover the IHT on your estate is advisable, although it is important to consider factors such as age and health as the premiums can be very high;

n An individual can make gifts of up to �3,000 per year free from IHT and, alternatively, you can gift up to �250 per year to as many people as you like;

n Where an individual is accumulating income, they can make regular gifts out of general income free of IHT, without the seven year rule for gifts applying; and finally

n A very basic point, but if you spend more each year than your annual income, you will be reducing your capital, thereby reducing the value of the estate subject to IHT, unless you are spending it on assets which will increase in value.

We broadly welcome the proposal of a lower rate of IHT. However, we think HMRC should endeavour to make the new rules as clear as possible to avoid further complications in already complex legislation.

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