Leave a Gift to Charity to Reduce Your Inheritance Tax Bill

As the saying goes, you can’t take your money with you when you die, so it’s only natural that you might want to leave your wealth to those people closest to your heart, such as your children.

But this isn’t the only option open to you, as you can leave your money to a cause that means a great deal to you – and this can have significant benefits when it comes to inheritance tax.

Any gifts you make to charity are exempt from inheritance tax, so if you leave everything to a good cause, your estate wouldn’t have to pay it at all. However, very few people take up this option, as many will still want to leave a generous amount to loved ones.

But even in that case, there are still inheritance tax benefits to be had. If you bequeath more than a tenth of your estate to charity, the total amount of inheritance tax the estate pays will be 36 per cent, lower than the standard rate of 40 per cent on everything over £325,000, or £650,000 for a married couple.

Support a Cause You Care About

Donations made from people’s Wills can be a valuable source of income for countless charitable bodies, so if you want to explore this option, it’s worth spending time thinking about what cause or causes matter to you.

If you’re an animal lover, maybe a national or local animal charity could be a good option.

If you or a loved one has struggled with a long-term illness, such as cancer, you might want to donate to a charity that helps others with that condition, or perhaps a hospice that cares for those with terminal illnesses.

You might even want to support a museum or another cultural institution, or maybe a local community group.

The choice is yours, which means that your Will gives you a great opportunity to leave a positive legacy in an area you care about, or say thank you to a charity that has helped you personally or supported a loved one.

Speak to Your Family and Get Financial Advice

Before you write or update your Will with a view to leaving a gift to a charity, it might be worth speaking with members of your family beforehand.

Many of your family members might be hoping or expecting to receive an inheritance from you, so explaining the reasons behind your decision can help to prevent any upset or family disputes further down the line.

You should also consider speaking to a financial adviser if you are thinking of gifting to charity as part of your estate planning, so they can discuss the inheritance tax implications with you.

A regulated, professional adviser will also be able to talk you through other ways of making sure your estate planning is more tax-efficient.

What Can I Leave to Charity?

You can leave either a set amount of money or a particular item to your charity of choice. Alternatively, you can ask the executor of your estate to take care of awarding a set sum to a charity after other costs have been paid out and gifts to family members distributed.

It’s often said that the only two certainties in life are death and taxes, but with careful planning, there’s no reason why you can’t reduce your inheritance tax bill and leave a positive legacy behind. Please don’t hesitate to get in touch with us if you have any questions about making your estate more tax-efficient.

Following an in depth study conducted by the National Centre for Social Research (NCSR) and the Institute for Fiscal Studies (IFS), it has been discovered that only one in four people making financial gifts are aware of the risks of inheritance tax. Further to this, they found that only 45% of gifters reported being aware of inheritance tax rules and exemptions when they gave their largest gift.

A staggeringly low 8% of respondents considered tax rules before making a financial gift and most did not associate gifting with inheritance tax. When compared with the fact that over half of respondents said that they planned to leave inheritance, it’s obvious that there seems to be a gap in gifter’s knowledge.

For those who were aware of the rules surrounding inheritance tax, 54% said this influenced the value of their largest gift. This was most prevalent amongst affluent taxpayers who had assets of £500,000 or more. Respondents below this threshold had more limited knowledge of the long-term effects of inheritance tax, the seven-year rule or the annual limit on gifts.

So, where does the money go?

80% of gifters gave to individuals, with charities coming in second at around 10%. The most common beneficiaries were adult children, followed by 15% giving to parents or other family members and 14% making gifts to friends. The most popular reasons were presents for birthdays and weddings.

The data also suggested that even when individuals considered inheritance tax rulings, it did not deter them from giving the gift.

The rules

Gifts of £250 or less, totalling below £3,000 per year, are exempt from inheritance tax. Most gifts, in fact, made from one individual to another during their lifetime are exempt, unless the donor dies within seven years of making the gift. These gifts are referred to as potentially exempt transfers (PETs).

The current starting threshold for inheritance tax for a single person is set at £325,000. This amount is then doubled for married couples and civil partners, who also have the additional benefit of the residential nil-rate band, which allows for a further £150,000 of tax-free, property-based inheritance per person. This particular allowance is set to rise to £175,000 as of the 20th of April 2020.

An unsuccessful PET is taxed depending on how long the gifter has lived following the giving of the gift and is referred to as ‘taper relief.’ If a gift is given less than three years before death, the full rate of 40% is applied to the gift, tapering off to 8% if the gift was given between six to seven years before death.

However, this is not the case when it comes to transactions with a reservation of benefit. For example, if you give away your home to your children and continue to occupy it rent-free, the property is still considered as forming part of your estate immediately if the worst were to happen. An individual cannot retain possession of a chattel or property whilst making a PET.

Though it may be difficult to plan for the worst, knowing how to best mitigate the tax surrounding gifts and inheritance can help you make key financial decisions at the most opportune moments, and prevent any avoidable losses when it comes to sharing your assets with the people and organisations that matter most to you.