Whilst public spending cuts have increased this year, the Government has given a major tax incentive to those who wish to leave money to charity upon death.
Currently inheritance tax is charged at 40%, but by leaving a part or all of your estate to one or more charities, this will reduce or eradicate your estate’s inheritance tax liability altogether. By leaving a legacy or a percentage of your estate to charity, this will not be included for inheritance tax as charities are deemed to be ‘exempt beneficiaries’ or non-tax payers. Therefore, should you decide to leave everything to charity, then there will be no inheritance tax to pay.
You can also reduce the inheritance tax on your estate from 40% to 36% by leaving 10% or more of your net estate to charity.
For example, if you have an estate worth £500,000 and your individual tax-free threshold is £325,000. Your inheritance tax will be 40% of £175,000. This means you will pay £70,000 of tax. However, should you decide to leave 10% of your estate to charity (£17,500), then this will qualify for the reduced rate of inheritance tax at 36% so you will only pay £63,000 of tax instead.
Whilst making a charitable donation would decease any entitlement that your other beneficiaries would receive, you would save £7,000 from your tax bill.
How to leave something to charity – before you die
There are tax benefits for leaving money to charity whilst you are still alive. If you estate stays below the ‘nil rate band’ of £325,000, then there won’t be any inheritance tax to pay. There are also other tax benefits, such as income tax, when you leave money to charity whilst you are alive.
Charities can benefit even further from your charitable giving, for example, donations through Gift Aid mean that charities can claim an extra 25p for every £1 that you give. However, charities cannot always claim this extra allowance if it comes, for example, from limited companies or from charity cards or of vouchers, for example Charities Aid Foundation (CAF) vouchers. You will need to ask the charity first whether your gifts can benefit from this extra allowance.
You can always donate to a charity directly from your wages or your pension. Your employer, company or pension provider might run a Payroll Giving scheme which allows you to donate straight from your salary or pension pot. The benefits to this are that income tax is deducted after these gifts are made.
The tax relief you get depends on the rate of tax you pay. To donate £1, you pay:
- 80p if you’re a lower rate taxpayer
- 60p if you’re a higher rate taxpayer
- 55p if you’re an additional rate taxpayer
Keep in mind that you also have your tax-free Personal Allowance of £11,500 which is the amount of income that you do not have to pay any tax on. There are further allowances for married or civil partnerships as well.
If you decided instead to gift land or property or shares to charity you won’t have to pay any tax on this either. If a charity asks for you to act in the sale of the gifted property or land then you will need to make sure that you keep records of this for your self-assessment. You are able to claim both income tax and capital gains tax in this case.
How to leave something to charity – after you die
The best way to leave something to charity after you die is in your Will. Your Will is the only legally binding document that ensures your wishes are carried out. As discussed, there are inheritance tax benefits to gifting a percentage or all of your estate to charity.
You can make donations to charity in the form of a pecuniary legacy, which is a fixed sum of money. The dangers of this are that the amount you gift now will be a disproportionate value if you were to die in 20-30 years’ time. The best way to ensure that the charity receives the same proportionate amount that you wish to give is indexed linked. Otherwise you can always leave a percentage of your estate to charity after all liabilities have been settled.
There are still dangers when it comes to writing and executing your Will. You will need to ensure that you include the charities name with the correct spelling and their registered charity number, which you can find on their website or the central register. You will also need to prepare for the probability that the charity might cease to exist or merge with another charity. It is best for you to state in your Will what will happen to the money for the charity should they cease to exist, so that your estate can still benefit from an exempt or lower rate of inheritance tax.
If you would like more information on how Freeman Harris can assist you or your family with making a Will or probate and estate administration, please contact our team on 020 7790 7311 or email us at email@example.com.