Uk inheritance tax - reducing via charitable giving

My British mother needs to make a new will since her existing one is no longer really appropriate.  My understanding is that she intends to make a few smallish bequests to friends, family and charities and then leave the bulk of her estate to me.  It has come to my attention that if she donates 10% or more of her estate to charity the IHT tax rate reduces to 36%.  This might save her Estate a few grand and allow her to direct more money to her favorite charities.  What I don’t quite understand is how to calculate the 10% as I don’t understand the impact the various nil rate allowances may have.  I am hoping if I lay out the details here one of you wonderful, knowledgeable people can tell me since I don’t quite trust/understand the HMRC calculator.

Mother is a widow, owns her home which is worth somewhere around 900k.  She has in the region of 425k in other investments.  She inherited 258k nil rate band allowance and the additional £175k family home allowance from my father.       Gifts above the £3k per annum limit made in the last 7 years amount to 40k given 5 years ago, and a car value around 4K given last year.  Can someone show me how I calculate what the 10% minimum would need to be? Is  it 10% of everything? 10% after the nil rate band? Or what?. Thanks!

My British mother needs to make a new will since her existing one is no longer really appropriate.  My understanding is that she intends to make a few smallish bequests to friends, family and charities and then leave the bulk of her estate to me.  It has come to my attention that if she donates 10% or more of her estate to charity the IHT tax rate reduces to 36%.  This might save her Estate a few grand and allow her to direct more money to her favorite charities.  What I don’t quite understand is how to calculate the 10% as I don’t understand the impact the various nil rate allowances may have.  I am hoping if I lay out the details here one of you wonderful, knowledgeable people can tell me since I don’t quite trust/understand the HMRC calculator.

Mother is a widow, owns her home which is worth somewhere around 900k.  She has in the region of 425k in other investments.  She inherited 258k nil rate band allowance and the additional £175k family home allowance from my father.       Gifts above the £3k per annum limit made in the last 7 years amount to 40k given 5 years ago, and a car value around 4K given last year.  Can someone show me how I calculate what the 10% minimum would need to be? Is  it 10% of everything? 10% after the nil rate band? Or what?. Thanks!

 

I can't answer your question directly, but ... I recently read a case study of a similar situation where a person wished to leave a substantial amount of money to charities in his will, and although on the face of it, the situation looked straightforward, the answer bamboozled me. It wasn't anywhere near as straightforward as it appeared.

Considering the substantial amounts of money involved, I think hiring a decent accountant and appointing a decent solicitor as executor is the best solution, to avoid paying any unwanted tax.

 
Considering the substantial amounts of money involved, I think hiring a decent accountant and appointing a decent solicitor as executor is the best solution, to avoid paying any unwanted tax.

I agree. I would be only guessing otherwise. I would have thought with the housing allowance (inherited by children) and her late husband's allowances that the total before IHT would be £1m. (£325k+£175k for her and her husband)


I have not heard of the 10% charitable giving rule but it seems to be quite clear that it is 10% of the taxable amount after the tax free allowance.

https://www.helpforheroes.org.uk/give-support/ways-to-donate/leave-a-gift-in-your-will/inheritance-tax/#:~:text=Find%20out%20more.,you%20and%20your%20particular%20circumstances.

The 10 percent rule
Leaving a gift of 10 per cent or more of the net estate value over the IHT threshold to charity can reduce the rate of Inheritance Tax payable on your estate from 40 per cent to 36 per cent.

To ensure your Will is drafted correctly to take advantage of the reduced IHT rate we strongly advise you to use an experienced legal adviser.

I'm not an expert here - although I've been looking myself at ways to stop Rachel Reeves getting here hands on any of my pension pot that I worked so hard to accumulate!

I think the 36% rate you mention is in fact the 40% rate reduced by the 10% gift to charity (40% less 10% = 36%). It's a bit confusing. Give 20% and the rate becomes 32%, give it all to charity and there is no IHT. The IHT rate is 40% - if your mother leaves more than 10% of her estate before IHT to charity (the minimum is 10%) then IHT does not apply to the charitable gift. See here:

https://www.gov.uk/donating-to-charity/leaving-gifts-to-charity-in-your-will

The best way I can find to avoid IHT (legally!) is to move to the US, where Estates Tax (the US equivalent of IHT) kicks in at estates valued over $13.99M
https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax Could be quite tempting if this Labour Government continues to pursue it's agenda of tax & spend, tax and spend. As Boris Johnson once quoted:

It is always the same with Labour. In the end, as Margaret Thatcher said, they always run out of other people's money" 

I don’t know how much income your mother has but one is allowed to gift as much of their excess income as they want. HMRC provide a budget worksheet to calculate this. See box 6 on page 1 of IHT403, and then page 8. I have created a spreadsheet mimicking page 8 that I update every year to make it easier for the will executor. Income in this case is classed as salary, pensions, interest, rents and dividends. Pension drawdown is not considered income in this case as it is really the sale of assets.

My wife and I are very fortunate to have a total of 8 pensions between us plus dividends and rental income from a couple of houses. Consequently we have been gifting well over the £3k limit to each of our 2 children this past 7 years. We also made lump sum payments (recorded on page 4) to assist in their moving here and buy houses and cars. That 7 years is now past so those gifts have now fallen off the chart. (It is 40% tax for the first 3 years then tapers off by 10%/year to zero after 7 years)


https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf

Thanks for all the helpful info, I think I ‘get it’ now. We’ll be seeing a solicitor to get the will drafted and will discuss with her, also my accountant.  I can’t advise her to anything too clever or complicated as she won't understand it and will  worry, or worse will think I’m trying to ‘steal her money’🙄
Thanks for the advice re: the amounts that can be given from excess income, this certainly applies here, but again it’s difficult to get her to understand the amount of money she has and her her income versus her typical outgoings and her life expectancy. When I suggest spending to buy up things that I think would improve her life the answer is often ‘but I might need that money’.  Once frugal always frugal I guess!