How to work out if the 36% rate applies  

In practice this won’t be as obvious as the previous example. 

Further, there are different components to work out. 

General Component – this is basically the estate passing under the Will. 

Trust Component  – this is made up of any trust that forms part of the deceased’s estate for tax purposes (a qualifying Interest in possession trust). 

Survivorship Component – this is made up of any assets jointly owned that pass automatically to the survivor owner i.e. joint bank accounts. 

IHT may be payable across all three components. 

Each component must meet the 10% to charity element in order for the tax on that component to be charged at 36% rather than 40%. 

To establish this it is necessary to proportionately share the NRB between the components and to establish the “baseline” amount. If 10% or more of this is going to charity the 36% rate applies. 

For example: 

Todd leaves an estate consisting of:

Family Home owned as Joint tenants with his girlfriend Paula £450,000

Cash £400,000

Investment Property £300,000

He had not made any gifts. 

In his Will he left £50,000 to charity and the residue of his estate to Paula. 

Todd’s father had died many years previously leaving him a life interest trust in his father’s house which had been let to tenants. This was worth £500,000 at the time of Todd’s death. 

Todd’s estate has three components:

Survivorship Component £450,000

General Component £700,000

Trust Component £500,000 

The first step to ascertain the baseline amount is to apportion the NRB. We do this after deduction of the charitable legacy from the general component. 

Component        Survivorship  Trust General 
£ £ £
Chargeable Amount 450,000 500,000 650,000
Less NRB: (91,406) (101,563) (132,031)
Total 358,594 398,437 517,969
Add Legacy 50,000 
Baseline Amount 358,594 398,437 567,969
X10% 56,797

The amount to charity does not exceed 10% of the baseline amount so the 40% rate applies. 

If the amount left to charity above had exceeded the 10% baseline amount the 36% rate would apply to the estate. 

It is also possible to merging the components if the amount left to charity exceeds the baseline amount for more than one component combined. This means more of the taxable estate will pay tax at 36%.