Lifetime Planning and Wills expert, Sarah Loveless, considers how giving to charity can reduce the amount of Inheritance Tax paid by your estate. Our Lifetime Planning and Wills team, are available by email, or by calling 01225 755656. Alternatively, you can complete the contact form at the foot of this page.
Clients often instruct us to include gifts to charity in their Will, typically to an organisation with whom they have an affinity or personal connection. But charitable giving has another advantage. Gifts of money or physical assets to charity, whether made during your lifetime or in your Will, are exempt from Inheritance Tax (IHT). This is the government’s way of encouraging more people to give or leave money to charity.
And if you are inclined to be particularly generous to charity, there is a further incentive. For people dying after 5th April 2012, who leave 10% or more of their net estate to charity, the rate of IHT is reduced from 40% to 36%. In some instances, this can save the estate many thousands of pounds.
In deciding whether the estate will benefit from a reduced rate of IHT, the total amount left to charity is compared to a ‘baseline amount’. The ‘baseline’ for this purpose will be the value of the estate charged to IHT after deducting all available reliefs and exemptions and the nil-rate band, but excluding charitable legacies. To qualify for the lower rate of IHT, the total left to charity must amount to 10% or more of the baseline.
In terms of estate planning, this calls for very careful drafting of the Will.
Deed of Variation
If a beneficiary named in the Will chooses to pass on their legacy to charity, it is worth considering giving effect to that transfer as a Deed of Variation. This is a document that allows the beneficiaries in a Will, by agreement, to change the distribution of the estate. If a Deed of Variation is executed within two years of the date of death, the gift to charity by the beneficiary is treated as if it had been made by the deceased person. As such, the estate can benefit from the charitable exemption.