What you leave to your family when you die can potentially be reduced by a significant amount thanks to Inheritance Tax (IHT). Often called “the UK’s most hated tax”, Brits pay around £5.3 billion a year in tax, with this number set to rise in the coming years.
At present, your beneficiaries could face a hefty 40% tax charge for any part of your estate that exceeds the tax-free threshold. In 2021/22 this threshold is £325,000, plus you may also be able to use the additional £175,000 “residence nil-rate band” if you leave your home to children or grandchildren.
One way that you can mitigate a potential IHT bill is by leaving a charitable legacy. So, it’s perhaps no surprise that new figures show that there has been a recent surge of after-death charity donations.
Charitable donations left after you die are not subject to IHT in the UK, meaning that the government does not take the standard 40% cut on charity contributions.
In fact, if you leave at least 10% of your worth to charitable causes when you pass, your inheritors can pay a reduced IHT rate of 36%, instead of the usual 40%. Read on to find out how you could reduce your potential Inheritance Tax bill while also donating to good causes.
Post-death charity donations are on the rise, though many still don’t know it’s an option
There are several reasons why IHT is becoming an issue for more and more families across the UK.
Firstly, the chancellor’s decision to freeze the nil-rate bands for IHT means that thresholds are not rising in line with the cost of living. For example, the tax-free allowance has sat at £325,000 for nearly two decades, but house prices have risen by more than 50% during that same period.
Strong investment growth has also boosted the wealth of many families. Combining the increasing value of homes with even modest ISA or shareholdings can easily see an estate tip over the IHT threshold.
With tens of thousands of people likely to be affected in the coming years, it’s never been more important to implement strategies to mitigate tax. One of these is by considering leaving a charitable legacy or donating to charities during your lifetime.
As far back as 2019, the Co-op stated that charitable donations in wills were jumping by 53% year-on-year. And since the pandemic, the kindness of the public has only increased.
In 2020, the number of wills including charitable bequests rose by a further 61%, with cancer charities topping the list of named beneficiaries.
Only recently have charitable donations become common after death. Nearly a third of all drafted wills now contain a donation to charity, resulting in nearly 100 will-based donations every day. Seven-figure charity bequests increased by 31% in 2017/2018, to a staggering total of 3,043.
How a 10% charitable donation reduces the value of your estate and the IHT rate
When writing your will, it could be worth researching and deciding upon charities you wish to give a donation to. By doing so, you could reduce the overall value of your estate.
All gifts made to charity, whether during your lifetime or in your will, are exempt from IHT. There’s no restriction on the size of the gift, and so it can pay to make gifts to charity during your lifetime.
Leaving a charitable gift in your will has two main advantages:
- It reduces the size of your estate for IHT purposes
- If you leave at least 10% of the value of your estate to charity, it reduces the IHT rate payable on your estate from 40% to 36%.
If you’re thinking about leaving a charitable legacy in your will, you have three main options:
- Residuary legacy – where you leave the whole of your estate or a percentage of your estate, once all other bequests have been made and any other costs and debts covered.
- Pecuniary legacy – a gift of a specified sum of money to your chosen charity. This is the simplest and most common way of donating to charity in your will.
- Specific legacy – a gift of a particular item to your chosen charity. You must specify the item in your will.
Of course, charitable donations are about much more than tax benefits. Gifting money to causes that mean something to you gives you the chance to make a real and lasting impact, both on the work that your chosen charities can do and on the lives of those the charity helps.
There’s never been a better time to leave a charitable legacy
The Telegraph reports that, in 2019, people left more than £3 billion in their wills to good causes. According to Co-op Legal Services, about 13% of all charity income in the UK comes from donations left in wills.
The pandemic has been unforgiving for non-profit organisations across the country. In June 2020, Pro Bono Economics published a report suggesting that charities across the UK were set to face a £10.1 billion funding gap thanks to coronavirus.
Rob Cope, director of Remember a Charity, says: “Legacy income has been vital for charities, particularly over the past year when events and retail were so badly hit, and that’s why continued reports of the public’s increased appetite for legacy giving is so welcome.”
If you want to help struggling causes, lifetime gifts or a legacy in your will can be a great way to support their fantastic work, and potentially reduce your family’s tax bill.
Get in touch
To find out more about making charitable donations tax-efficiently, please get in touch. Contact us by email at firstname.lastname@example.org or call us on 01189 876655.