What are the inheritance tax benefits of leaving a legacy to charity?
If you leave part of your estate to charity when you die, anything passing to the charity is exempt from Inheritance Tax (IHT).
In addition, if at least 10% of your estate passes to charity, there is a special reduced rate of IHT (36%) which applies to the rest of your estate. This can significantly reduce the IHT liability.
Does inheritance tax apply to me?
Inheritance tax is chargeable on some lifetime gifts, and on the value of your estate when you die, if the value exceeds your available allowances and exemptions. Each individual has a “nil rate band” allowance (NRB) which is currently £325,000. The excess above this allowance is subject to inheritance tax at 40%. In some circumstances, there are other allowances and exemptions which may also be available.
Should I increase the legacy to charity in my Will?
If you leave at least 10% of your taxable estate to charity, then the rate of inheritance tax on the remainder drops to 36%.
Generally, around 76% of the charity gift would otherwise have gone to HM Revenue & Customs. The amount inherited by the family is typically reduced by around 2% – 3% (compared to no gift to charity), but many people consider this is worthwhile.
If you already have a charity legacy in your Will, increasing it to 10% of the taxable estate can actually result in an increase to the amount your family inherits, as well as a significant reduction in the IHT payable.
Can I claim gift aid?
There are 2 tax advantages to making donations to charity in your lifetime:
- The charity can claim an extra 25p for every £1 you donate.
- If you are a higher rate (40%) taxpayer, you can claim back 20% of the uplifted amount donated. For example, if you donate £100, and the charity claims Gift Aid, you can also claim back £25 tax.
Gift aid cannot be claimed on a legacy to charity in your Will. It only applies to charities that are registered in the UK with charity tax status.
How can Gardner Leader help with philanthropy?
We can advise you with philanthropy on inheritance tax planning, Wills, lifetime gifts, trusts and a wide range of charity law matters. Contact Penny Wright to find out more here.