Last year saw a considerable rise in the number of charitable gifts left in Wills.
In fact, the total number of charitable gifts left in 2022 amounted to £21.3 billion.
So, if you are named as the Executor of a Will and a charitable gift is included, you might be wondering how this impacts the estate and the amount of Inheritance Tax (IHT) due.
Do charitable gifts contribute to the value of the estate?
In ordinary cases, gifts made within seven years of the death will be included in the estate’s value.
But gifts given to charities following the death of the individual are exempt from IHT and could even reduce the amount of IHT due.
How can charitable gifts reduce Inheritance Tax (IHT)?
If 10 per cent or more of the net value of the estate passes to charity, a reduced IHT rate of 36 per cent will apply to the estate above the nil rate band instead of the standard IHT rate of 40 per cent.
To determine whether a charitable gift qualifies the estate for the lower rate of IHT, a figure known as the baseline is used.
This figure is the value of an estate after the nil rate band and any other exemptions and reliefs have been deducted, but before the gift to charity has been made.
For instance, if the estate is worth £1.5 million, the baseline is:
£1.5 million less £325,000 (nil rate band) less £175,000 (residence nil rate band) = £1 million.
In this case, for the estate to qualify for the lower rate of IHT, a gift of at least £100,000 must be made to charity.
The beneficiaries can also decide whether to gift part of the estate to charity following the individual’s death to meet the level required for the estate to be taxed at the lower rate.
How can Rotherham Taylor help?
As tax experts and a licensed provider of probate services, we can guide you through the probate process, from valuing the estate to distributing the assets.
We can also ensure you fulfil your tax obligations and meet the necessary return deadlines, so you don’t have to worry.
