IHTM45012 | Reduced rate for gifts to charity: calculating the baseline amount: estate with two or more estate components

Where there are two or more components to the estate, the donated amount (IHTM45002) and the baseline amount (IHTM45009) must be calculated separately for each component and the reduced rate applied to the component(s) that meet the 10% test. It will not be uncommon in these circumstances for one component to be taxed at the full rate of and another at the reduced rate.

Example

Elizabeth died on 17 May 2012 leaving assets owned personally valued at £750,000 after deduction of liabilities. She bequeaths 10% of the residue of her estate to Cancer Research. She held a joint bank account with her son, Andrew, which had a balance of £60,000 at death. Both contributed equally to the account so £30,000 is included in her estate as joint property passing by survivorship.

In this case the estate contains two components, a survivorship component and a general component. The donated amount in the general component is £75,000. The joint account passes by survivorship to Andrew, so the survivorship component cannot qualify for the reduced rate.

The baseline amount for the general component is calculated following the steps in IHTA/Sch1A/Para 5 as follows:

Estate on death = £750,000

Legacy to charity (donated amount) -£75,000

Chargeable transfer = £675,000 (step 1)

Less proportion of nil-rate band -£311,170 (see below)

Step 2 amount = £363,830

Add back legacy to charity +£75,000

Baseline amount = £438,830 (step 3)

(The proportion of the nil-rate band is calculated as follows: £675,000 ÷ (£675,000 + £30,000) × 325,000 = £311,170)

The charitable giving condition (IHTM45002) or 10% test requires that the donated amount is at least 10% of the baseline amount. Here the legacy of £75,000 exceeds 10% of £438,830 or £43,883, so the general component qualifies for the reduced rate. The reduced tax liability will be £130,978.80 compared to £145,532 at full rate.

The tax on the survivorship component will be

Chargeable transfer = £30,000

Less proportion of nil-rate band -£13,830 (£30,000 ÷ (£675,000 + £30,000) × £325,000 = £13,830)

Excess = £16,170

Tax at 40% = £6,468

Where the amount qualifying for charity exemption in one component exceeds the 10% test (as is the case in this example), the beneficiaries of the estate may want to consider making an election to merge the components (IHTM45035) to gain the maximum benefit from the reduced rate.