It’s Christmas aka the season of giving. In keeping with the festive spirit let’s talk about giving to those less fortunate than us and how that can mean paying less to the Grinch (the taxman).
Inheritance Tax
A quick recap on inheritance tax, this is a tax payable on your estate (your assets including your home, money and possessions) when you die. The tax is generally paid on the value of the assets in a deceased person's estate above a certain threshold (typically the Nil Rate Band of £325,000 and potentially the Residence Nil Rate Band of £175,000). Both Nil Rate Bands are transferable between spouses after the first death and the basic rate of tax payable on anything above your available threshold is 40%.
Giving Money to Charity to Save Inheritance Tax
Since April 2012, estates have had the opportunity to qualify for a reduced inheritance tax rate of 36% under specific conditions. To meet the criteria, a Will must allocate at least 10% of the ‘baseline amount’ to charity. It's important to note that this 10% is not calculated on the entire estate but rather on the amount remaining after deducting specific allowances from the estate (i.e. the baseline amount). By satisfying this requirement, the estate can benefit from the lower inheritance tax rate, reducing it from the standard 40% to the reduced rate of 36%.
Cash Gifts to Charity
The most straightforward method of leaving a charitable legacy in your Will is through a cash gift. Such gifts not only contribute to a charitable cause but can also help decrease the inheritance tax liability in your estate. There is flexibility in the number of cash gifts you can give, however it's crucial to consider the cash flow in your estate when you die. Cash gifts are typically prioritised and must be settled within one year of your death to avoid incurring interest. Planning for these considerations ensures that your charitable intentions are fulfilled efficiently whilst being mindful of the financial dynamics within your estate after your passing.
Gifts of Residue to Charity
Another option you have is to designate a percentage of your residuary estate to charity in your Will. However, if your residuary estate is being distributed among both charitable and taxable beneficiaries (your children etc), the calculation of inheritance tax can become complicated. Therefore, detailed drafting of your Will is crucial to clearly outline your intentions regarding the allocation of inheritance tax.
Making Smaller Donations
Even if the charitable donation constitutes less than 10% of the total estate, it can still have a meaningful impact on reducing your inheritance tax liability. This is because your gift will be subtracted from your net estate before calculating your inheritance tax liability. In essence, every charitable contribution, regardless of the percentage, plays a role in mitigating the overall inheritance tax burden.
Top Tips
Non-registered charities and (now) non UK charities might not qualify so check that your chosen charity is registered with the charity commission.
If you are leaving specific items such as jewellery, consider whether the charity will be able to use them and whether there will be any costs involved in transporting your goods.
If you want to make suggestions to the charity on how they should use your gift, check with your chosen charity first. For example, you may want to stipulate that your gift goes towards a certain type of research. It is important to make sure the charity can do this otherwise they might not be able to utilise your gift.
It’s important to remember that whilst leaving 10% of your estate to charity reduces the amount going to the taxman, it also reduces the amount your beneficiaries will get from your estate. Whilst you may prefer to give your money to charity rather than to HMRC, some of the charitable gift will be coming out of your beneficiaries’ pocket.
If you would like more information about leaving gifts to charity in your Will, please contact any member of our Wealth Management and Taxation team on 01494 521 301.