Inheritance tax mistake can risk loved-ones owing thousands of pounds

Loved-ones could be charged thousands of pounds if complex inheritance tax rules aren’t met, solicitors have warned.

Those with charitable legacies are being urged to check their will after one family lost £50,000 because of an error.

Almost 37,000 estates included a gift to charity in 2022 according to the legacy information provider Smee and Ford.

Gifting to charity is a well-known strategy for reducing an Inheritance Tax (IHT) bill - if the gift makes up more than 10 per cent of an estate.

Gifting a charity can reduce an Inheritance Tax bill
Pexels

An IHT bill will then be reduced to 36 per cent, down from 40 per cent.

However, depending on how the will is drafted, gifting part of an estate to charity could leave a smaller sum than intended.

Caroline Burke, was faced with an unexpected £50,000 bill after the solicitor who wrote her aunt’s will failed to state whether IHT should be deducted before or after the gifts were calculated.

The 72-year-old, who acted as executor, thought she had distributed her estate correctly with family members and three charities – until she received a call from on charity to say their bequest was £50,000 short.

Transfers to charities are free from inheritance tax but by default if the deceased shares their estate between charities and loved ones, it will be family and friends who bear the tax.

Jade Gani of the law firm Circe Law said: “The basic principle is that where someone’s share is exempt from IHT, their share shouldn’t be lessened by any IHT due on the rest of the estate.

“So, if the estate is split between a charity and family, then, unless it’s made very clear in the will, the beneficiaries will get less.

"This can give rise to inheritance disputes where the beneficiaries believe the testator wanted to leave them a larger sum.

Families can lose thousands of pounds if a will is incorrect
Dominic Lipinski

"To avoid confusion, solicitors will sometimes include a clause in the will referencing one of two court cases – Re Ratcliffe (1999) or Re Benham (1995)."

In Re Ratcliffe (1999), the charities benefit from gross residue before IHT is calculated, so they received a larger gift – meaning the non-exempt beneficiaries endure the IHT.

In comparison, in the case Re Benham (1995), the exempt and non-exempt beneficiaries should receive the same amount, therefore gifts are calculated after IHT is deducted.

Burke, whose name has been changed, said she wants to raise awareness of the complexities of donating.

She told The Telegraph: “I have no problem with giving money to charity. And my aunt was a wealthy woman so we could afford it. But other families might struggle to pay £50,000 out of the blue.”