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Leaving a Gift to a Charity in your Will

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The COVID-19 pandemic has highlighted the importance of charity more than ever.

Charities play a hugely significant role in helping vulnerable people and rely on the good will of ordinary people to raise funds. At present around one third of all donations charities receive are from legacies in Wills. These legacies fund thousands of vital services to communities up and down the country, provide research into a wide range of medical issues, and campaign on causes nationally and globally.

Not only is leaving money to a charity in your Will a kind choice to make, it can also reduce, or in some cases eliminate the amount of inheritance tax your estate pays.

  1. Any gift you make to a charity is exempt from Inheritance tax and is deducted from the value of your estate for calculating how much inheritance tax your estate pays overall.

    Example: let’s say your estate was worth £425,000 and you were leaving it to your only child. The threshold for paying inheritance tax is £325,000 (this is called the nil rate band) leaving the value of your estate subject to inheritance tax at £100,000 – this would be taxed at 40% leaving a inheritance tax bill of £40,000.

    If you left a gift to a charity or charities totalling £5,000, then the this would mean that the value subject to inheritance tax would be £95,000, reducing the inheritance tax liability to £38,000 – a tax saving of £2,000

    In essence this means that if your estate is going to be taxable 40% of the value of any legacy you leave is going to be as a reduction in tax, rather than the whole sum coming out of the share of your estate that your other beneficiaries receive.

  2. If you leave 10% of your estate (after the deduction of the nil rate band) to charity your estate receives a reduction in inheritance tax rate of 4% meaning that the value of your estate that is subject to inheritance tax is taxed at 36% rather than 40%

    Example: using the same scenario as above, the taxable part of your estate is worth £100,000. If you left 10% of this to charities (£10,000) then the taxable part of your estate would be reduced to £90,000, having deduced the part passing to charity as this is now exempt form inheritance tax.

    The taxable part of your estate would now be taxed at 36% giving a tax liability of £32,400 this would be a tax saving of £7,600

In reality most people’s estates aren’t as simple as the figures above suggest, and the rules relating to the reduced rate of inheritance tax can be quite complicated, however very beneficial to your estate. If you wish to discuss leaving part of your estate to a charity, or the inheritance tax implications for your estate more generally, please do not hesitate to contact a member of our Private Client team on 0208 422 5678.

 

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