Did you know that you can reduce your inheritance bill by donating to charities? Find out more by reading the article below.
What is it?
Making gifts to charity can be an effective way to reduce the amount of inheritance tax (IHT) payable on your estate. Charitable gifts can work to reduce the IHT payable by:
• Reducing the value of the net estate chargeable to IHT; or
• Where the gifts to charity are worth at least 10% of the net estate at death, reducing the rate at which inheritance tax payable.
What are qualifying charities?
A qualifying charity must meet one of the following conditions:
• A charity that is established in the EU or another specified country;
• It meets the definition of a charity under the law of England and wales;
• It is regulated in the country of establishment, if that is a requirement of that country;
• Its managers are fit and proper persons to be managers of the charity.
What will this mean?
If a gift is made to a charity, the net estate is reduced by the amount of the gift.
This can reduce the amount of inheritance tax payable where the value of the estate exceeds the nil rate band (currently £325,000), plus the residence nil band rate.
So, the gift to charity reduces the net value of the estate.
Susan died on 1 December 2018 leaving an estate worth £475,000. She never married and had no children. In her will she left £5,000 to a qualifying charity, and the balance of her estate to her niece Claire.
Her total estate of £475,000 is reduced by the charitable gift to £470,000. After deducting her nil rate band of £325,000, her taxable estate is £145,000 on which IHT of £58,000 (£145,000 @ 40%) is payable.
The charitable gift reduced the IHT payable on her estate by £2,000 (5,000 @ 40%).
A reduced rate of IHT
Where the charitable gift is at least 10% of the net estate, the rate of inheritance tax is reduced from 40% to 36%. The net estate is the value of the estate after deducting any debts, liabilities, reliefs and exemptions and the nil rate band and residence nil rate band, as appropriate.
Albert died on 20 October 2018. He left an estate of £700,000. He never married and had no children. In his will he left £40,000 to a qualifying charity, with the balance of his estate split equally between his three nephews.
Total estate: £700,000
Less: qualifying donation to charity (£40,000)
Less: nil rate band (£325,000)
Taxable estate £335,000
The value of the estate in excess of the nil rate band is the £375,000 (£700,000- £325,000). This is the baseline amount. The qualifying donation to charity of £40,000 is more than 10% of this amount. Thus, the rate of inheritance tax on the taxable estate is reduced from 40% to 36%.
So, the inheritance tax payable on Albert’s estate is £120,600 (£335,000 @ 36%).
If the residue of the estate is partially exempt, for example if it is left to a surviving spouse or to a charity, and the will contains other legacies that are left free of tax, it may gross up some legacies to test if the 10% test is met.
HMRC produce a calculator which can be used to check whether the test is met. You can access this on the Gov.uk website at www.gov.uk/inheritance-tax-reduced-rate-calculator.
Overall, it is important that you consider the benefits as well as the complications of reducing your inheritance tax through gifting charities.
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