How gifts to charities can reduce your Inheritance Tax liability
6th September 2023 by Alison Lloyd
Many people choose to donate to charities during their lifetime. Lifetime donations and gifts under a Will to charities are exempt from Inheritance Tax. This article explores the benefits of leaving money to a charity under the terms of your Will.
Gifts to charities are exempt from Inheritance Tax regardless of the value of the gift. The current Inheritance Tax rate is 40% but if you leave at least 10% of the taxable value of your estate to charity the Inheritance Tax rate is reduced to 36%.
The taxable estate is calculated by deducting a deceased’s tax-free allowances from the net value of the estate as at the date of death.
This means that an estate worth £1,000,000 with two nil rate bands available of £325,000 would have a taxable estate of £350,000 and therefore to qualify for the reduced rate of Inheritance Tax at least £35,000 would need to pass to charity.
If you are considering making a gift to a charity under your Will it is important to calculate the taxable estate. If the gift you are intending to make equates to 4% of your taxable estate, you can increase this to 10% without any reduction in the amount your other non-exempt beneficiaries receive.
Example
| Charity Gift
|
0% | 4% | 10% |
| Charity receives
|
0 | £14,000 | £35,000 |
| IHT (40 / 36%) | £140,000 | £134,400 | £113,400
|
| Non-Charity Beneficiaries receive | £210,000 | £201,600 | £201,600 |
The charity in the above example would receive an additional £16,000 without any loss to the non-exempt beneficiaries..
If the gift to charity is less than 10% of the net estate, it may be possible for the deceased’s beneficiary to increase the gift to charity after the testator’s death by executing a Deed of Variation so that the lower rate of 36% applies to the rest of the estate.
For further information on tax planning or charitable gifts please contact a member of the Private Client Team on 01202 377894.
Alison Lloyd
Partner — Private Client
Direct dial: 01202 377963
Alison is head of our Private Client team specialising primarily in Estate Administration and Powers of Attorney.
She has undertaken private client work for over 25 years in the local area, since qualifying as a Chartered Legal Executive in 1998. Prior to moving to Laceys in 2023, she headed up a very successful dedicated Probate team within a large corporate environment dealing with a wide range of estates and intestacies from the very straightforward to the more complex and high net worth estates.
Alison adopts a sympathetic and patient approach to a family’s needs at what can be a very emotional time. She prides herself on being efficient and professional but friendly and approachable at the some time.
Outside of the office Alison is married with a teenage daughter and enjoys cooking, reading, spending time with family and friends and foreign travel.
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