As people in the UK are being encouraged to get their will drawn up and their estate planning in order, there are several ways to reduce the amount of inheritance tax payable on a deceased person’s estate. One of these is the inheritance tax relief received by leaving a gift to charity.
As the value of property increases so does the value of people’s estates, pushing them above the £325,000 inheritance tax threshold. Indeed, the OBR, Office for Budget Responsibility, are suggesting that by 2026 there could be as many as 50,000 estates falling victim to inheritance tax. But by leaving a gift to charity in your will, your beneficiaries could receive inheritance tax relief.
What is inheritance tax relief?
First, let’s start with explaining inheritance tax. It is the amount of tax your beneficiaries will pay on your estate upon your death. Currently, the inheritance tax rate is 40% and the threshold is £325,000. So, if your estate is valued at £600,000 and you deduct the threshold amount of £325,000, your beneficiaries who have inherited your estate will pay 40% tax on the remainder – £275,000 – to HMRC. If the estate is valued at less than £325,000, there is no inheritance tax payable.
However, there are some tax allowances that can reduce the amount of inheritance tax paid by your estate beneficiaries. One of these allowances is if a percentage or the entire estate is ‘gifted’ to a charity, or the estate is left to a living spouse or civil partner. Inheritance tax relief also applies to gifts that have been made to a beneficiary seven years prior to the death of the testator.
Why leave a gift to charity?
Many people have favourite charities which they have supported in their lifetime, and they often choose to further support the charity upon their death by leaving a gift to them in their will. As well as the charity benefiting from the gift, it can also benefit the deceased’s family by reducing the amount of inheritance tax (IHT) payable.
When gifts are left to qualifying charities – a charity that is established for a charitable purpose and satisfies jurisdiction, registration and management conditions – the level of IHT applied to the deceased’s estate above the threshold drops to 36%, as long as a minimum of 10% of the net estate’s value (the baseline amount) is gifted.
So, taking our example above, if the deceased gifts £50,000 to charity, which is above the 10% baseline amount, and the cost of funeral expenses and paying any debts are deducted, i.e. £20,000, the amount of IHT payable is £275,000 – £70,000 = £215,000 x 36% = £77,400.
So, the total amount payable to HMRC is £77,400, leaving £137,600 to the deceased’s beneficiaries as their inheritance.
What to consider when leaving a gift to charity in your will?
If you are thinking about leaving a donation to a charity in your will, here are some points to consider:
● Cash or asset – leaving a gift to charity doesn’t have to be cash; you can also leave an asset, such as property, jewellery, antiques or even artwork. It is then up to the charity what they do with that asset. In addition, you can also leave what is known as a reversionary gift; this is a gift, like a physical asset, that is initially left to the deceased’s specified beneficiary, usually a spouse, and upon their death it passes to the charity.
● Ensure it is a qualifying charity – not every charity can claim to be a qualifying charity so make sure the charity you choose is registered with the Charity Commission in England and Wales. Scotland and Northern Ireland have their own charity register where you can check to see if the charity you’ve chosen is registered. If your charity is not registered but adheres to the Charities Act definition of a charity, your estate and beneficiaries will still benefit from inheritance tax relief.
● Add any instructions – when making a gift to charity, you may want the funds you give, or the asset, to be used in a specific way, such as aiding research. In this situation, you can add any instructions to your gift in your will but make sure you discuss with the charity of your choice first, to ensure it is feasible for the charity to honour your wishes.
● The gift value may change – if you are gifting a lump sum to a charity or a percentage of your estate, be aware that this may change and the charity may receive less than you intended. By index-linking the gift, you can protect your charitable gift from increases in inflation which would impact a lump sum. However, if gifting a percentage of your estate and the value of your estate decreases in size, you may wish to adjust the percentage of the gift in your will.
● Residual gifts – similar to the above, if you leave the residual amount of your estate, i.e. what’s left after expenses, debts and any other legacies have been deducted, you may find that the charity receives a greater proportion of your estate because their gift is tax-free, whilst another beneficiary will have tax deducted from their share.
● Double-check the charity’s details – when drawing up your will in advance of your death and making a gift to a charity, always keep up to date with the charity’s details, such as any name changes to the charity, or a different address or the charity closes. Therefore, add the charity’s registration number (if there is one) and if not, update your will accordingly.
● The cause of a dispute – always be upfront with your family and other beneficiaries about your charitable gift in your will. In accordance with the Inheritance Act (Provision for Family and Dependants) 1975, beneficiaries have the right to dispute a charitable gift. So to avoid any disputes after your death, make your intentions clear and reassure family and beneficiaries they will be provided for in the future.
At Probates Online, we are able to offer a professional probate service online that is efficient and affordable. If you are an Executor of a will and need to apply for Grant of Probate, Letters of Administration or would like to take advantage of our entire Estate Administration service, visit our website for more information or contact us today.