Inheritance Tax & the benefits of giving to charity

by Sue Adams, 16 October 2016

If you are concerned about the level of Inheritance Tax that might have to be paid when you pass away, one option open is giving away some of your money to charity, either during your lifetime or in your will. Not only will you be able to support worthy causes that are close to your heart, but you will also reduce your tax bill. Below are some of your options:

Leaving something to charity in your will.

If you want to give a charity something in your will, you have a choice of how to do it. You can either leave:

  • A fixed amount by way of a cash legacy; or
  • A share / percentage what’s left when all debts and other legacies have been paid

Important considerations:

  • Ensure the name of the charity is spelled correctly (so there are no arguments or costly disputes)
  • Include the registered charity number of the charity and its registered address, which should appear on the charity’s website.

If you wish for a legacy to go to a local branch of the charity, rather than to the central office, check firstly with the charity if this is possible. Some branches are unable to accept gifts themselves, but a carefully worded statement of wishes will often see funds directed to a local branch or for a specific purpose.

Cutting your Inheritance Tax bill

If you leave a legacy to charity in your will, then it won’t count towards the value of your estate, that is, everything you leave behind, minus any debts and could reduce or eliminate any Inheritance Tax liability.

Furthermore if you leave at least 10% of your net estate (after any exemptions have been taken into account) to charity, this reduces the rate of any Inheritance Tax you do pay from 40% to 36%.

Example:

  • You are not married or in a civil partnership
  • You have your full Inheritance Tax allowance (currently £325,000) available on your death and
  • Your net estate is worth £425,000 when you die and you leave it all to your partner who co-habits with you.
    Your estate will not pay any Inheritance Tax on the first £325,000 of the cash and property you leave behind, minus any debts and expenses. There will be Inheritance Tax to pay at 40% on £100,000 (£425,000 minus £325,000).

This means that your estate will pay £40,000 of Inheritance Tax (40% of £100,000).

However, if you leave a legacy of £10,000 to charity, you will qualify for a reduced rate of Inheritance Tax of 36% instead of 40%. This will be paid on the £90,000 that’s liable to Inheritance Tax (£100,000 from the original example, minus £10,000 to charity).

This means your estate will pay Inheritance Tax of £32,400 (36% of £90,000).

It is worth noting that your partner would receive less, but if you are keen to support a charity, this may be something to consider. Particularly if your partner has sufficient funds of their own too.

The calculation of the amount which has to be given away to qualify for the reduction in the rate of Inheritance Tax from 40% to 36% is not altogether straightforward, so it would therefore be advisable to talk to a suitably qualified professional to check how the figures would work in your case before including this kind of gift in your will.

Gifts to charity outside your will

There’s nothing to stop you from giving to charity right now. You can make a cash donation or give them anything you own and it won’t be counted as part of your estate when you die and therefore can help reduce your potential Inheritance Tax liability together with supporting a worthy cause.

If you require any further information on this, then please do not hesitate to contact Sue Adams, a Solicitor, Partnerand Head of the Private Client team specialising in Wills, Lasting Powers of Attoney and Grants of Probate on 01202 204561 or alternatively at sueadams@steeleraymond.co.uk.

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Sue Adams

Partner
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