Gifts to Charities and Inheritance Tax

Many people like to include a gift to their favourite charity or charities in their Wills but are not aware that there are different ways of doing so and by ensuring the gift amounts to at least 10% of the net value of their estate they reduce the rate at which inheritance tax is paid.

Many charities rely heavily on revenue generated by gifts in Wills and for those with an estate already subject to inheritance tax, a gift of at least 10% of the net estate to charity will reduce the rate at which tax is payable from 40% to 36% with very little impact on the amounts that will be paid to their non-exempt beneficiaries. 

If someone has already died it is not too late to take advantage of this provision as it is possible to vary an estate within 2 years of a person’s death to incorporate such a gift and take advantage of the reduced rate.

Legacies to Specific Charities

A gift to charity will often take the form of a specific amount to a specific charity.  This has the advantage of being certain and if you inform the charity you have left them a gift in your Will, they can use this information to predict their income for the future.  However, a fixed amount can quickly lose its value in real terms.  Inflation has become more volatile in recent years and £3,000 today is not worth as much as £3,000 even 5 years ago let alone 10 or more. 

If you wish to leave larger sums to charity by way of specific amounts you may find that the proportionality between those gifts and the gift of the residue to your family and friends becomes distorted.  Legacies are always paid after debts and administration costs but before the gift of the residue.  This can have unintended consequences particularly if an estate has been depleted by care costs.

Issac’s Will

Issac has an estate worth £400,000. His Will leaves a gift to his favourite charity of £40,000 and the residue to his children.  The gift to charity equates to 10% of his estate with 90% going to his family.  Unfortunately, Issac becomes unwell and spends two and half years in a care home at a cost of £200,000.  His estate is worth £200,000 when he dies.  The gift to the charity is now 20% of his estate with only 80% passing to his children. 

Had Issac remained in the care home for more than four years, the care costs could easily have amounted to in excess of £350,000 meaning the gift to charity would be paid in full with nothing left for the children.

A Gift of Part of the Residue to Charities

An alternative to a set amount is to leave a gift by reference to a share of the residue. 

Issac’s Will

If Issac had included a gift of 10% of the residue of his estate to his favourite charity he would have ensured that his children always inherit 90% of the residue.  It would have had the added advantage that if he had not had to go into a care home but instead his estate had increased in value, for example to £500,000, the gift to charity would also have increased.

A General Charitable Intention

A gift to charity does not always have to be to a specific organisation, you can let your executors/trustees (PRs) decide.  A letter of wishes can be prepared to give guidance to your PRs which can be changed at any time giving you greater flexibility with no need to constantly update your Will if your intentions change. 

Reducing the Rate at Which Inheritance Tax is Paid

Gifts made to charity are always free of inheritance tax but if you ensure you leave at least 10% of the net value of your estate to charity you can reduce the rate at which you pay tax on the remainder of your estate.

The calculation of 10% is not as straightforward as you might think and might not amount to as much as you think.  The definition of ‘net value’ of the estate for this purpose is the value of the estate after deducting exemptions, reliefs and the nil rate band (currently £325,000).  Please note this does not include the residence nil rate band. 

Rebecca’s Will

Rebecca has an estate worth £2,800,000 and includes a farm worth £1,200,000.  She wants to ensure her estate pays tax at 36% and not 40%. She would need to leave at least 10% of the net estate to charity. The table below illustrates the effect of not including a charitable gift at all, leaving 4% of the residue and leaving 10% of the residue.   It is interesting to note the difference between leaving 4% and 10%.

NB. The Farm qualifies for agriculture property relief (APR) and Rebecca is a widow and has inherited her Husband’s nil rate band

The availability of either one, two or no nil rate bands can have a dramatic impact on the minimum amount needed to go to charity to qualify for the reduced rate. In the table below you can see the effect of Rebecca having no nil rate band as she has made lifetime gifts that have used up the band and the difference it would make it Rebecca was divorced rather than widowed.

Rebecca’s Will

Conclusion

Using a Will to make charitable gifts is a highly effective way of benefiting the worthy causes close to your heart and if you already have a taxable estate, reduce the rate at which inheritance tax is payable.  It may come as a surprise that the amount payable is not as great as you might think in order to qualify for this benefit.

Contact Us

Our Wills team will be happy to guide you through everything you need to plan for your future. Simply give us a call on 01543 420000 and ask for one of our Private Client Team.

Catherine Elliott, Helen Jolly, Helen Phillips, and Lisa Edge are all on hand to help you.

If you prefer, please email us on office@keelys.co.uk or fill in our online Will questionnaire by following this link Wills Questionnaire – Keelys Solicitors LLP