Inheritance tax relief predicted to hit £900m through charitable donations

Inheritance tax relief claimed on charitable donations is predicted to reach £900m next year, according to UHY Hacker Young.

Inheritance tax relief increased by 16% last year to £880m, compared to £760m in the previous year. The amount is significantly higher than the £420m saved in 2010-11.

UHY Hacker Young said that one reason behind the rise in inheritance tax relief was attributed to individuals feeling “increasingly more comfortable” about leaving money to charities, as their children had “frequently already built up substantial savings” by the time of the death of their parents, as a result of increased life expectancy.

In addition, the introduction of a second-tier discount rate by HMRC, which reduces the inheritance tax rate on an entire estate from 40% to 36% in cases where charitable donations equal or exceed 10% of the estate, also could have contributed to the increase in inheritance tax relief. The regulations apply to deaths occurring after 5 April 2012.

UHY Hacker Young warned that as charitable donations rise, so does the possibility of legal disputes, with dependents challenging their parents’ wills.

Roy Maugham, tax partner at the top 15 firm, said: “Individuals are increasingly diverting a large slice of their wealth both during their lifetime and on death to charities as their traditional heirs, their children, are now more frequently financially independent by the time of their parents’ death.

“With many principal heirs of an age where they often will have already achieved a reasonable level of financial security, many elderly parents may not feel as obliged to leave them everything in their estate.

“As a result, many more individuals are increasingly putting charities as beneficiaries in their wills, in the knowledge the amount will obtain relief from inheritance tax in itself, and if it is equal to or exceeds 10% of the total estate the rate of tax on the rest of the estate will be reduced by a factor of 10%.

“As property and share prices continue to increase, and consequently charitable donations, relief on legacy incomes look set to easily breach £900m in the next year.”

Key changes to the UK inheritance policy entered into force in April this year, including an increase to the residential nil rate band.

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