How can a gift to charity in your Will make your estate work harder?

Ian Bond

Partner, Irwin Mitchell and Remember A Charity Campaign Supporter

Public appetite for charitable gifts in Wills is increasing; almost one-third (31%) of charity donors aged 40+ with a Will say they have included a gift to charity.¹

There are generous inheritance tax (IHT) reliefs associated with gifts in Wills. Savvy planners can utilise these benefits to help their estates work harder both for the loved ones named in their Will and the charities they care about.

How gifts in Wills affect inheritance tax

Unless subject to exemptions or relief, IHT is payable at a rate of 40% on assets over the current nil-rate band of £325,000. Gifts can work to reduce the amount of tax payable in two ways.

Any gifts left to charity are exempt from IHT.

Any gifts left to charity are exempt from IHT. The gift is deducted from your overall estate value, which can reduce the amount taxed. A reduced rate of IHT is also applied when 10% or more of the taxable estate is left to charity, meaning the rest of your estate over the £325,000 threshold will be taxed at a reduced rate of 36%.

How to use these incentives to maximise your estate

Let’s use the example of Adam, who is single. He leaves his £425,000 estate to his friend, Zoe. Adam’s taxable estate (amount above the nil rate band of £325,000) is £100,000; on which IHT is payable at 40%. This gives a tax bill of £40,000, with £385,000 passing to Zoe.

However, if Adam includes a £4,000 gift to charity, with the remainder going to Zoe, the taxable value of his estate is reduced. His IHT bill will be £38,400 — 40% of £96,000 (£100,000–£4,000); his charitable gift results in an IHT saving of £1,600. Zoe and the charity combined receive a total of £386,600 — Zoe getting £382,600 and the charity £4,000.

Finally, if Adam increases his £4,000 charitable legacy to £10,000, this would equate to over 10% of his taxable estate. Adam’s IHT bill would be £32,400 — 36% of £90,000 (£100,000–£10,000).

Zoe and the charity receive a combined total of £392,600, with Zoe receiving £382,600. The increase from £4,000 to £10,000 has cost Zoe nothing, but the impact on the charity could be phenomenal.

A lasting legacy

For many charities, gifting in Wills is one of their largest sources of donations and funds 6 out of 10 RNLI rescue launches, over a third of Marie Curie’s hospice care and supports hundreds of community-based charities across the UK. By including a charitable gift, your estate takes care of everything important to you.

[1] Remember A Charity, OKO, Legacy Giving Consumer Benchmark Study