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Inheritance Tax Reduction

How is Inheritance Tax reduced?

If your estate is valued in excess of £325,000 when you die, Inheritance Tax (IHT) may be due. But any gifts you make to The Gordon Foundation (or any registered charity) during your lifetime or in your Will will be exempt from Inheritance Tax. In addition, since 2012, if you leave 10% of your estate to charity, the tax on the remainder of your estate is paid at a reduced rate of 36% instead of 40%, which could in some circumstances be a significant benefit to your beneficiaries. In order to qualify for the reduced rate you must leave at least 10% of the net value of your estate to a qualifying charity. The net value of your estate is the sum of all assets after deducting any debts, liabilities, reliefs, exemptions and the nil-rate band.

In the following example, a donation to The Gordon Foundation of £50,000 may be made at a cost of only £15,000. So by donating to a charity, it is possible to significantly reduce your Inheritance Tax.

Without Legacy gift:

Total value of estate = £750,000
Less £325,000 Inheritance Tax Threshold (nil rate band)
Taxable amount = £425,000
Tax @ 40% = £170,000
Net residue of estate = £580,000

With Legacy gift:

Total value of estate = £750,000
Less £325,000 Inheritance Tax Threshold (nil rate band)
Taxable amount = £425,000
Legacy to The Gordon Foundation = £50,000
10% Charity Threshold = £42,500 (threshold for applying 36% IHT Passed)
Taxable Amount = £375,000 (£50,000 - £325,000 - £50,000)
Tax at 36% = £135,000
Tax at 36% = £135,000

Therefore, The Gordon Foundation receives £50,000 but the net residue of your estate goes down by only £15,000.