Through our work as probate experts and tax advisers, we are often asked about giving money in wills and an estate to charity.
Leaving something to a good cause in your will is a generous act, but it can also make good financial sense for your estate in the long run.
How charitable gifts are treated for inheritance tax
Any gift left to a UK registered charity in your will is entirely exempt from Inheritance Tax, regardless of size. This immediately reduces the value of your estate that’s subject to tax.
Gifts made during your life to UK-registered charities are also entirely exempt from Inheritance Tax and fall outside of the regular sever-year rule, which sees tax tapered depending on when a gift is made.
The 10 per cent rule
There’s a further benefit available to larger estates. If you leave at least 10 per cent of your net estate to charity, the rate of Inheritance Tax on the rest of your estate drops from 40 per cent to 36 per cent.
The 10 per cent threshold is calculated against what’s known as the baseline amount, broadly the value of your estate after deducting debts, reliefs and your available nil rate band.
Getting the wording and the sums right matters, since falling just short of the threshold means missing out on the lower rate altogether.
Why it’s worth considering
For some families, increasing a charitable gift to reach the 10 per cent threshold barely changes what other beneficiaries receive, because part of the extra gift is effectively funded by the tax saving rather than coming straight out of their share.
Talk to our team
If you’re reviewing your will or thinking about how to structure your estate, we can help you work out whether a charitable legacy makes sense for your circumstances and how to draft it correctly to secure the reduced rate. Please get in touch with our team.
