Upping your charitable gifts tax effectively
Gifts in your will to qualifying charities are not subject to inheritance tax e.g. £5,000 to the London Legal Support Trust* is exempt from IHT. However, you can go a step further in your gifting to charity in your will and obtain further tax benefits.
Most people do not know that if they leave 10% of their estate to charity above the available reliefs such as the nil rate band (currently £325,000 per person) the inheritance tax rate drops to 36% instead of 40%.
This means that your chosen charities get money and HMRC receives less. There is even a sweet spot where if you have the 10% clause, the charities get money, HMRC gets less and your beneficiaries receive more than they originally would. This all depends on the size of your estate and we can help you with your estate and inheritance tax planning in this regard.
If you do not know to which charities you wish to leave your legacy, you may leave it to your trustees’ discretion or set up a Charities Aid Foundation Trust into which the 10% is paid; this then allows the funds to be distributed over time and depending on the circumstances and, the Charities Aid Foundation agreeing, can allow you to receive the charity relief to go to charities which might not be eligible for the relief if funds were left directly, e.g. they are not left to a UK charity or one in the EEA.
If someone has left money to charity in their estate but it does not reach 10%, the beneficiaries may wish to do a deed of variation within 2 years of the death to increase the gift to charity to take advantage of the 36% rate. I have done this for clients on a number of occasions.
* Branch Austin McCormick take part in the annual walk to raise funds for the London Legal Support Trust which funds legal advice centres. You can support this worthy cause with the link https://londonlegalsupporttrust.enthuse.com/pf/branch-austin-llp
Example: If you leave 10% of your estate (above the NRB) to charity IHT reduces to 36%
Bachelor John Smith dies with estate of £750,000 – don’t worry he had a fabulous life full of wine, women and song.
John’s taxable estate: £750,000 – £325,000 (NRB) = £425,000
If he leaves it all to family and friends (i.e. not to charity) IHT @ 40% = £170,000
If he leaves 10% (£42,500) to Alzheimer’s Society
IHT @ 36% = £137,700, Alzheimer’s Society Legacy £42,500 = Total cost to the estate £180,200 but the tax man is getting £32,300 less and your chosen charity is getting a significant chunk of cash to do good works.
For advice and assistance on making a Will please contact Miriam Spero at