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Know how to apply the 36% IHT rate? – CII R03, R06, AF1, AF5

Know how to apply the 36% IHT rate? – CII R03, R06, AF1, AF5

The 36% inheritance tax rate has been with us for a while now but who understands how it actually works? It’s one of those areas where we think we know until we actually have to try and answer a question on it. This article includes an example on how to apply the rate – useful for those studying for CII R03, R06, AF1 or AF5 exams.

The rule is that the person who has died must leave at least 10% of their estate to a charity. And that’s 10% of their net estate. The gift itself is still exempt from inheritance tax of course, so here’s how you work it out.

Tom, a widower, dies in July 2015. He leaves an estate valued at £700,000 of which he leaves £30,000 to charity and the rest to his children.

The first step is to take the charitable donation from the estate left on death – so £700,000 minus £30,000 is £670,000. You then deduct the nil rate band of £325,000 which equals £345,000 – this is the taxable estate.   Step 3 involves adding back the charitable donation to find the net estate of £375,000. 10% of this amount is £37,500 so because the gift is less than this, Tom’s estate will pay IHT at 40% on his taxable estate of £345,000.

A deed of variation can be done to increase the charitable donation to 10% of the net estate which would have the following effect:

Step 1 £700,000 minus the charitable donation of £37,500 = £662,500

Step 2 £662,500 minus the nil rate band of £325,000 = £337,500 (taxable estate)

Step 3 £337,500 + £37,500 = £375,000 (net estate)

Now his estate can utilise the 36% IHT rate on the taxable estate of £337,500 which equals £121,500.

This leaves £541,000 for Tom’s children compared with £532,000 if Tom had left £30,000 to charity.

It seems everyone (except Tom) is a winner – the charity receives £7,500 more in donation and the children receive an extra £9,000.

Things can get complicated if there’s joint property or the deceased had an interest in possession in trust property, but we hope that the above explains the basics.

The online HMRC calculator is a brilliant tool, and we would recommend you have a look at here:

It tells you if the particular example you’ve put in qualifies or not for the reduced rate, and if it doesn’t, it then goes on to tell you how much the minimum donation would need to be in order to qualify. Very helpful.

Grab the resources you need!

If you’re studying for your CII R03 exam, and you don’t feel 100% confident of a pass, grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the R03 calculation workbook taster now!

Click here to download our free calculation workbook taster for CII R03

Alternatively, you can download the taster for AF1, R06 or AF5 if any of those exam are causing you worry.

Over to You…

Did you know how to apply the 36% IHT rate before reading this? Seem straightforward?