Legacy Managers' Newsletter

• Published date: 30 August 2021
• Subject Matter: Corporate/Commercial Law, Charities & Non-Profits , M&A/Private Equity, Trusts
• Law Firm: Winckworth Sherwood
• Author: Mr Philip Allen and Samantha Warner

Is there a simple summary of the 36% rate?

The principle is simple: since 6 April 2012 the rate of IHT charged on the whole estate at death can be reduced by 4% from 40% to 36% where 10% of the estate is left to charity. This relief is only available for the gift made on death.

It gets more complicated, although in many cases in practice it is not. The best way of trying to get the 36% rate is to have a will which contains a "formula clause" that is specially designed to qualify for the relief. A variation of the estate after death might achieve the same thing but should not be relied on because the circumstances by the time of death might mean that, even if a variation can be done, it cannot achieve the relief.

Someone's estate on death can consist of one to three "components": (i) assets passing to a co-owner by survivorship; (ii) trust assets in which the deceased had a life interest; and (iii) their normal "free estate" (or "general component"). It is quite rare for anything apart from the free estate to be involved.

In order to calculate whether at least 10% is reached in respect of a component of the estate on death, the following 3 step calculation is done:

1. the net taxable value of the estate component is calculated including deducting the charity exemption;
2. the available nil rate band (or the appropriate portion of it if there is more than one component) is deducted from step 1 above and
3. the charity exemption is then added back to the answer at step 2 - this gives you the "baseline amount".

In respect of each component of the death estate, the 36% rate applies if the value of the gift to charity from that component is 10% or more of the baseline amount for that component.

Simple example - general component only

Adam was survived by his wife Belinda. Adam left all his estate to Belinda who died on 9 December 2020. She left:

(a) '200,000 to charity;

(b) '100,000 to her grandchildren; and

(c) The residue of '2,000,000 to her daughter Clare.

Belinda's executors claim a double standard nil rate band because Adam's nil rate band was unused. (The residence nil rate band is not relevant here.)

Belinda had no joint property (so the survivorship component is irrelevant) and no interests in any trust property (so that component is irrelevant too).

Belinda's estate on death consists of just her standard free estate or general component. The baseline amount calculation is:

1. '2,300,000 (the total value of this component ie (a), (b) & (c) above) minus...