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Where there are two or more components to the estate, the donated amount (IHTM45002) and the baseline amount (IHTM45009) must be calculated separately for each component and the reduced rate applied to the component(s) that meet the 10% test. It will not be uncommon in these circumstances for one component to be taxed at the full rate of and another at the reduced rate.

Example

Elizabeth died on 17 May 2012 leaving assets owned personally valued at 拢750,000 after deduction of liabilities. She bequeaths 10% of the residue of her estate to Cancer Research. She held a joint bank account with her son, Andrew, which had a balance of 拢60,000 at death. Both contributed equally to the account so 拢30,000 is included in her estate as joint property passing by survivorship.

In this case the estate contains two components, a survivorship component and a general component. The donated amount in the general component is 拢75,000. The joint account passes by survivorship to Andrew, so the survivorship component cannot qualify for the reduced rate.

The baseline amount for the general component is calculated following the steps in IHTA/Sch1A/Para 5 as follows:

Estate on death = 拢750,000

Legacy to charity (donated amount) -拢75,000

Chargeable transfer = 拢675,000 (step 1)

Less proportion of nil-rate band -拢311,170 (see below)

Step 2 amount = 拢363,830

Add back legacy to charity +拢75,000

Baseline amount = 拢438,830 (step 3)

(The proportion of the nil-rate band is calculated as follows: 拢675,000 梅 (拢675,000 + 拢30,000) 脳 325,000 = 拢311,170)

The charitable giving condition (IHTM45002) or 10% test requires that the donated amount is at least 10% of the baseline amount. Here the legacy of 拢75,000 exceeds 10% of 拢438,830 or 拢43,883, so the general component qualifies for the reduced rate. The reduced tax liability will be 拢130,978.80 compared to 拢145,532 at full rate.

The tax on the survivorship component will be

Chargeable transfer = 拢30,000

Less proportion of nil-rate band -拢13,830 (拢30,000 梅 (拢675,000 + 拢30,000) 脳 拢325,000 = 拢13,830)

Excess = 拢16,170

Tax at 40% = 拢6,468

Where the amount qualifying for charity exemption in one component exceeds the 10% test (as is the case in this example), the beneficiaries of the estate may want to consider making an election to merge the components (IHTM45035) to gain the maximum benefit from the reduced rate.