Did you know a philanthropic act can actually save you money? Clare Gorman explains how gifts to charity can reduce your inheritance tax bill…
What is the current rate of inheritance tax?
Inheritance tax is usually charged on someone’s estate when they pass away, but it can also be applicable to gifts made during your lifetime.
The current rate is 40%, payable on assets (or certain gifts) that exceed the nil rate band, which stands at £325,000 at the moment.
An additional allowance was introduced in 2017 that applies if your property passes to a direct descendant, such as a child or grandchild. Currently, this removes another £175,000 from any taxable amount.
I have heard gifts to charity can reduce the rate of inheritance tax. Is this correct?
Gifts to qualifying charities are exempt from inheritance tax, so if you bequeath a fixed sum, a particular asset or percentage of your estate, this would not usually be included in the taxable amount.
Leaving more than 10% of your wealth to charity can reduce the rate of inheritance tax on the remainder to 36%. This must be calculated on your net estate, however and that can be difficult. We are here to help, by drafting your will to ensure the reduced rate would apply and determining the amount passing to your chosen charity when the time comes.
By saving some of the inheritance tax burden, leaving more than you intended initially to charity can actually increase the amount your other beneficiaries receive.
Sometimes, people choose to give their tax-free allowance to family or friends and anything exceeding it to charity. This ensures no inheritance tax is payable, but again, it is important to have your will drafted correctly to avoid confusion.
Is it possible for the person dealing with my estate to choose which charities benefit, as my preferences may have changed by the time I die?
You can name specific charities in your will, or leave it to the executors and trustees to decide. This gives the person administering your estate the flexibility to use their discretion and evaluate who should benefit, based on the circumstances at the time of your death. For example, you may have recently become involved with a particular organisation that you would want to assist.
It can be useful to prepare a letter that is stored with your will explaining your wishes and giving your trustees guidance, but remember, it needs updating if you change your mind.
To find out more about the tax implications of making gifts to charities, why not book a free 30-minute consultation with one of our probate specialists? Telephone (0114) 218 4000, email: email@example.com or complete this form.