Large Charitable Gifts in a Will reduces an Inheritance Tax Bill
You may have read reports and articles concerning a ‘million pound nil rate band’. However, if you pass away having never married/entered into a civil partnership and with no children to survive you, it is likely that anything above £325,000 in your estate would be taxed at the Inheritance Tax (IHT) rate of 40%.
In this circumstance, there is a method to reduce your inheritance tax bill and at the same time, help charities you have an affinity for.
If you include a gift to charity in your will, the donation will be taken off the value of your estate before Inheritance Tax is calculated. You can donate to more than one charity, however the charity or charities have to be registered with HMRC for tax purposes.
If you include charitable donation in your Will that is worth 10% or more of your net estate (known as ‘the baseline amount’) - broadly speaking your estate will be charged at a reduced IHT rate of 36%.
The baseline amount is very easy to calculate for an estate where property does not pass by survivorship or does not include any trust property. You simply take the value of the estate and deduct the funeral expenses, debts and take into account any exemptions and reliefs and the basic nil rate band. The relief would apply if the charitable donation is worth at least 10% of this amount.
Here is a basic example of how this works:-
Adam, a UK citizen, leaves a net estate worth £400,000 and passes away without a partner or children. He does not have any joint assets.
Adam has a legacy clause in his will leaving 10% gift of his net estate to a charity. His net estate is £75,000. (£400,000-£325,000).
The charity gift is 10% of the net estate, which is £7,500 (10% of £75,000). This is the minimum charitable donation to meet the ten per cent test.
Adam leaves his estate to his niece. £67,500 is liable for inheritance tax. (£392,500-£325,000)
£67,500 is charged at a special inheritance tax rate of 36%. Adam’s inheritance tax bill is £24,300.
Adam’s niece receives £368,200 after tax (£325,000 + £43,200)
If Adam had not left anything to charity:
Adam’s net estate is £400,000. Tax is chargeable at the amount of the estate above £325,000 which is £75,000.
£75,000 is subject to an inheritance tax charge of 40%. Adam’s inheritance tax bill is £30,000.
£45,000 is left over and Adam’s niece receives £370,000 (which is £1,800 more than if Adam had left £7,500 to charity).
If you would like to make a gift to charity, but you are unsure about which charity to leave a gift to, it is possible to include a general gift to charity clause in your will with a direction for your executors to make the choice for you. If you included a charity that no longer exists, your executors can apply to direct the funds to another charity with a similar purpose or you could put a clause to that effect in your will.