When you think about your legacy and what you might leave behind, does it include leaving a gift in your Will to charity? If not, there are numerous benefits. Not only will you be helping a not-for-profit organisation likely to be reliant on charitable donations, but you’ll also reduce the amount of inheritance tax (IHT) payable on your estate, leaving more of your hard-earned money going to a worthy cause and your loved ones, rather than the taxman.
Leaving 10% of your estate to charity reduces IHT to 36%
Leaving a gift in your will to charity and inheritance tax (IHT)
When you leave a gift in your Will to charity, the inheritance tax (IHT) reduces from 40% to 36%. If you have a large estate, this could offer a big tax saving. So, dividing your estate between your family and a charity might be a sensible IHT strategy in the long run. To understand the size of saving that could be achieved by leaving a gift to charity, you would need to calculate your net estate value, factoring in any property, trusts, and rising inflation.
Add a clause to your Will that index-links the gift against inflation
Calculating your net estate value before leaving a gift
Also known as a legacy tax relief, the charity gift must be 10% of your net estate value to qualify for this IHT reduction. The net value is calculated by deducting all available tax reliefs and exemptions. You need to include the available nil rate band but exclude the residence nil rate band. The available nil rate band will need to be applied if you have a trust in place. If you need help calculating your estate net value, speak to our financial planning team.
Here’s an example to show the benefit of leaving a gift in your will to charity:
- Colin died with an estate worth £600,000. After deducting the ‘nil rate IHT band’ of £325,000 and the ‘residence nil rate band’ of £175,00, as well as any outstanding liabilities, the net value of his estate was £100,000, which is subject to IHT at 40%.
- HMRC, therefore, received £40,000, and Colin’s two daughters received £560,000 to split between them.
But – if Colin decided to leave a gift in his will to charity of 10% of the net value of his estate, things would have looked a little different:
- Colin left a gift in his will to charity of £15,000, which was more than 10% of the net value of his estate (£100,000 x 10% = £10,000).
- Doing this meant he would benefit from paying the lower rate of 36% IHT on £85,000 over the nil rate bands after his charitable gift.
- HMRC received £30,600, almost £10,000 less than before. And a total of £569,400 went to charity and his daughters. The charity received £15,000, and Colin’s two daughters received £554,400 to split between them.
Colin could have also completely avoided paying any tax on his estate by gifting the entire £100,000 over the nil rate band to a charity. The charity would receive a substantial lump sum of £100,000, HMRC receives nothing, and his daughters received £500,000 between them, which is a great legacy to leave.
Gifts to registered UK charities are free from IHT
Gifts to UK charities
Any gift to a registered UK charity is exempt from inheritance tax. However, the key here is that they need to be officially registered. Search this Charity Register to find an authorised organisation. Many people choose a charity close to their hearts in terms of the support they have experienced personally or for a family member. It is your choice when choosing a charity, and never feel pressured to leave your money to a specific organisation.
Ask your executors to choose a charity
Charities chosen by executors
Some people want to leave a gift to a charity but are unsure who to choose. So, this is where you could leave it up to the executors named on your Will. A clause can be added to your Will stating that a proportion of your estate must go to charity. You would then include instructions to the executors in a letter of wishes to accompany your Will, asking them to decide on your behalf. You could offer guidance, for example, animal charities only.
Charities can be named as beneficiaries in a trust
Naming a charity as a trust beneficiary
In some instances, people might name a charity as a beneficiary in a discretionary trust, along with various family members who are also beneficiaries. The trustees will then have the authority to make gifts to your named charity or charities (you can have more than one). There are pros and cons of doing this, so we would recommend discussing this with our financial planners, so you understand exactly how this works.
Leaving a gift to charity in your Will could provide tax benefits and much-needed income to a non-profit organisation. However, you must ensure this is recorded in a legally binding Will. Keeping your Will up to date is very important, especially after a big life event or if you change your mind about how you would like your estate to be managed. It is always wise to discuss your intentions with loved ones to avoid any future difficult conversations or legal disputes with family members.
Our financial planners can help you write a legally binding Will that reflects your wishes. We can also advise you on tax-efficient ways to manage your estate, so it is passed on to the people or organisations you choose.
If you would like to leave a gift to charity or you need to discuss any aspect of your Will, please get in touch with our independent financial planning team.
Sources:
https://www.rememberacharity.org.uk/stories/four-things-you-might-not-know-about-gifts-in-wills/
https://www.professionaladviser.com/news/4043029/neil-macgillivray-double-benefit-charitable-gifting
https://www.gov.uk/find-charity-information
https://www.legalandgeneral.com/insurance/over-50-life-insurance/wills/gift-charities-in-your-will/
