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Tax and charitable giving

From 6 April 2017, a new residence nil-rate band (RNRB) was introduced. But not every estate will be able to claim it, so it is worth finding out whether it will apply to you.

Below are the answers to some questions you may have on how inheritance tax affects charitable Wills.

Are there tax reductions on charitable Wills?

Yes. From 6 April 2012, it became possible to reduce the rate of inheritance tax from 40% to just 36% if you leave 10% of the net value of your estate to charity.

What is the residence nil-rate band?

The RNRB will apply to an estate where a person dies on or after 6 April 2017 and leaves his/her home, or a share of it, to direct descendants, such as such as children, step-children or grandchildren.

The RNRB rules do not benefit you if you do not have children or if you wish to leave your home to other relatives. The value of the estate must not be more than £2 million.

The RNRB applies in addition to the existing nil-rate band (NRB) or threshold (currently £325,000) if the individual and estate meet the qualifying conditions.

How much is the RNRB?

The RNRB will be £100,000 in 2017/2018, £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21.

From 2021/22 it will increase in line with the Consumer Prices Index.

The RNRB will be in addition to the existing nil-rate band (NRB), currently £325,000.

Will the 36% reduction still apply? 

Yes, the 10% rule will still stand for the remainder of the estate in order to qualify for the reduced (36%) IHT rate.

To calculate this, you deduct the available nil-rate band (£325,000) from the value of the estate before taking off the amount left to charity. The available nil rate band includes any transferred NRB (i.e. NRB that a pre-deceased spouse didn’t use) but it does not include the new residence nil rate band.

Can you give an example of how the RNRB will work?

Pre-April 2017

Consider a £600,000 estate, before a gift to charity is taken into account, pre-April 2017. After the £325,000 NRB is taken off this leaves a net estate of £275k. This means at least £27,500 needs to be given to charity for the remainder of the estate (£275k – £27.5k = £247.5k) to qualify for the 36% rate.

Post April 2017

After April 2017, assuming the estate includes a main residence worth at least £100,000 that is going to children or grandchildren, the net estate is still £275,000. So at least £27,500 has to be left to charity for the estate to qualify for the 36% rate.

You will not be able to leave a smaller amount to charity after the new RNRB is introduced and still get the 36% rate.

This means you will not have to revisit your Will in light of this policy change in order to leave a sufficiently large sum to charity to get the reduced rate.

The examples above were given by The Treasury. Find out more about the RNRB from Gov.uk’s guidance or read our blog.

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