Assessing: examples of calculations: calculation with reduced rate where part of the estate passes to charity
Victoria died in August 2012 with free estate (Entry A) of £600,000, made up entirely of personal assets. Under her Will she left a legacy of £50,000 to charity. This reduced the chargeable value of her free estate to £550,000.
Victoria also had a life interest in a Will Trust (Entry B), which passes on her death. The trust is valued at £250,000 at the date of Victoria’s death.
Victoria’s husband, Daniel, died in March 2006. He left part of his estate to Victoria under his will. Victoria’s executors (IHTM05012) have made a claim to transfer the nil rate band (TNRB) that was unused on Daniel’s death to be used against Victoria’s death estate.
Calculate the available nil-rate band
The Inheritance Tax nil-rate band at the date Victoria died is £325,000. The amount of nil-rate band that is available to transfer from Daniel’s death is £125,000. This increases the IHT nil rate band on Victoria’s death to £450,000.
Apply the available nil-rate band to any lifetime transfers first
As Victoria made no lifetime transfers the whole of the nil-rate band of £450,000 is available to use against the death estate.
Find the chargeable value of the estate at the date of death
The chargeable value of the death estate, after deducting liabilities, exemptions and reliefs is £550,000 free estate plus £250,000 = £800,000.
Apportion the available nil-rate band
Because there is more than one entry (IHTM31011) we must apportion the available nil rate band of £450,000 between them, before we can work out the tax.
£450,000 × £550,000 ÷ £800,000 = £309,375
£450,000 × £250,000 ÷ £800,000 = £140,625
Calculate the tax on Entries A and B:
Because of the legacy to charity Victoria’s free estate qualifies for the reduced rate of tax for charitable gifts of 36% (IHTM45012)
£550,000 - £309,375 × 36% = £86,625
The Will trust is a separate component of the estate for the purposes of calculating the reduced rate and tax will be due on it at the full rate of 40%
£250,000 - £140,625 × 40% = £43,750
Here we will raise death estate calculations for:
- £86,625 at Entry A (NIOP)
- £43,750 at Entry B (NIOP)