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Can Gifting to Charity Reduce Inheritance Tax Liability?

on Wednesday, 03 May 2023.

It may be possible to reduce Inheritance Tax liability by making gifts to charity during your lifetime, or in your Will. We will take a closer look at the practicalities and benefits of making such gifts.

Inheritance Tax

Inheritance tax (IHT) will be payable on the value of assets in your estate in excess of your available Nil Rate Band (£325,000) and Residence Nil Rate Band (£175,000). Both Nil Rate Bands are transferable between spouses after first death. The basic rate payable is 40%.

Since 2012, it has been possible for an estate to qualify for a reduced rate of IHT (36%) if certain criteria are satisfied. To qualify, your Will must leave 10% of the baseline amount to charity. This does not mean 10% of your entire estate, but 10% of the amount reached when deducting certain allowances from your estate.

There are two ways to meet the 10% baseline test. You can either make cash gifts of a set amount, or insert a particular clause in your Will to ensure that you leave the exact amount required to achieve the 36% rate.

Making Cash Gifts to Charity

The simplest way to leave a legacy to a charity in your Will can be through a cash gift. A cash gift can reduce the IHT liability in your estate and you can leave as many cash gifts as you would like. However, when leaving cash gifts it is important to think about cash flow in your estate after you die. These gifts will typically be paid first, and must be paid within one year of death, or interest will be payable. This is known as 'the executor's year'.

Making Gifts of Residue to Charity

Alternatively, you can leave a percentage of your residuary estate to charity. If you are splitting your residuary estate between charities and taxable beneficiaries, the way that IHT is calculated can become very complicated. It is therefore important that your Will has been very carefully drafted to ensure that your intentions as to the apportionment of IHT are clear.

It is also important that your executors contact the charity beneficiaries early. They may be able to offer guidance and may wish to keep hold of assets that the executors would otherwise sell.

Tips When Gifting to Charity

    • Check that the charity is registered with the charity commission, as non-registered charities may not qualify.
    • If you are leaving specific items like jewellery or furniture, consider whether the charity will be able to use them and whether there will be any transport costs.
    • If you wish to limit how your gift will be used, check with the charity first. For example, you may want to stipulate that your gift goes towards research into a particular type of cancer that is subsequently cured before you pass away resulting in the charity not being able legally to use the gift.
    • If you are leaving a large gift it may be worth speaking to the charity whilst you are still alive. This can allow the charity to plan in advance and you may find that they would like to name something in your honour.
    • Think about substitution clauses in case the charity no longer exists, or changes their name or purpose by the time you pass away.

How Can We Help?

If you plan to leave legacies to charity, you should always make sure your Will has been professionally reviewed. You need to ensure that you are clear on the tax implications of leaving assets to charity, as well as the implications of getting things wrong. Our Estates, Trusts and Tax Planning team can provide specialist advice for those who are looking to make such gifts.

For more information, please contact Daniel Church in our Private Client team on 01923 919 368, or complete the form below.

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