Reduce inheritance tax by leaving a gift to charity
Details
Many people choose to make charitable gifts in their wills. Although not always considered part of estate planning, such gifts can reduce the inheritance tax (IHT) rate on death from 40% to 36% if used in the correct way.
Gifts to qualifying charities are themselves exempt from IHT regardless of the value of the gift. However, if a gift to charity in a will meets certain conditions, the lower rate of 36% IHT can apply to the taxable part of an individual’s estate.
The reduced rate of 36% applies where the individual leaves at least 10% of their net estate, known as ‘the baseline amount’, to charity. In simple terms, the baseline amount is the entire estate in an individual’s sole name (not including assets held in trust, or joint assets that pass by survivorship) less debts, funeral expenses and certain IHT exemptions – such as the nil rate band, currently £325,000.
Example:
Susanne dies with assets worth £700,000 all in her sole name. She leaves £40,000 to charity in her will with the balance passing to her niece, Sarah.
Susanne’s debts and funeral expenses are £15,000. She made no gifts during her lifetime therefore her full nil rate band of £325,000 is available. The baseline amount is calculated as follows:
| Estate | £700,000 |
| Less debts and funeral expenses | £15,000 |
| Less nil rate band | £325,000 |
| Baseline amount | £360,000 |
As the gift of £40,000 to charity is more than 10% of the baseline amount, the lower IHT rate of 36% will apply to the taxable part of her estate. As the £40,000 is not subject to inheritance tax, this will be deducted from the baseline amount to calculate the value of the estate that is subject to IHT at 36% ie £360,000 - £40,000 = £320,000.
The total IHT liability will be £115,200 (ie £320,000 x 36%), leaving £529,800 for Sarah.
Had Susanne decided to leave a smaller gift to charity, say £35,000 the IHT liability would be £130,000, leaving £520,000 for Sarah, ie both Sarah and the charity would receive less – to the advantage of HMRC.
Where the gift to charity falls short of the 10% of the baseline amount, it may be possible for a deceased person’s beneficiary to increase the gift to charity so that the lower IHT rate of 36% applies to the rest of the estate.
For further information on tax and succession planning, or charitable giving, please contact a member of the Private Client team.
