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CHARITABLE LEGACIES IN WILLS AND HOW YOU CAN REDUCE INHERITANCE TAX

Every year a large amount of money is donated to charity via legacies in wills and last year was no exception, with a record breaking £2.85 billion being donated to charity in wills. The average amount donated per estate is £3,300 and the average number of charitable bequests in a will is three. Charitable donations in a will can be beneficial from an inheritance tax perspective and is a useful way for many people to be able to support their favourite causes on their death.

Inheritance tax payments recently reached a new high, hitting £5.3 billion in the 12 months up to February 2018, resulting in a 13% increase. Understandably, more and more people are becoming concerned with the amount of inheritance tax that may be payable on their estate on death. Outright gifts to UK charities are exempt from inheritance tax. This means that there is no inheritance tax to pay on that part of the estate that passes to charity, whether by legacy or part of the residuary estate. To benefit from UK tax relief, a charity must be established for exclusively charitable purposes under English law.

A further benefit is that if you leave 10% or more of your net estate to charity, a lower rate of inheritance tax is available (36% rather than 40%). Generally, your net estate is defined as the value left over after deducting any exemptions, including any available nil rate band allowances. However, the lower rate of 36% can only apply if part of the estate is chargeable to inheritance tax at the higher rate of 40% i.e. there should be a mix of charitable and non-charitable beneficiaries. 

Please see an examples below of how this may work in practice: 

  • When you die, your net estate is worth £425,000.
  • In your will, you leave your entire net estate to your partner who lives with you.
  • You have your full inheritance tax nil rate band allowance (currently £325,000).
  • You weren’t married or in a civil partnership (so spousal exemption does not apply).
  • Thus, your net estate amounts to £100,000 (i.e. £425,000 less £325,000). 
  • Inheritance tax is payable at 40% on your net estate of £100,000 = £40,000.

   But if you wanted to reduce your inheritance tax bill by making a charitable gift in your will:

  • You could leave your partner £415,000 and £10,000 to charity (which is 10% of your ‘net value’ of £100,000).
  • Your estate would then pay the lower rate of 36% inheritance tax on £90,000 worth of assets.  Your inheritance tax bill would be £32,400.
  • Although your partner would receive less, making this charitable legacy, has reduced your overall inheritance bill, saving your estate £7,600. 

Overall, making charitable donations in wills is a cost-effective way to support your favourite causes. May people may not be able to give as much to charity as they would like in their lifetime, and therefore leaving a legacy in their will can be an easier way by which to leave a larger lump sum to charity. Furthermore, by donating a gift in your will to a charity that is important to you, you’re helping their work to continue in the future and leaving behind a legacy that will continue for future generations to enjoy as well as potentially saving on your inheritance tax bill.   

For any advice on estate planning, charitable legacies or drafting or reviewing your will, please contact Vassos Vassou, solicitor and Head of Private Client on VV@axiomstone.co.uk or 0207 016 9336.  

Article written by Emily Curtis-Bennett