Why it pays to be charitable
Charitable donations are typically made in people’s lifetime, but you can also make charitable gifts in your will. HMRC data for the last tax year shows that inheritance tax (IHT) reliefs on charitable donations was up 4% from the previous year to £1bn in total. One of the reasons may well be because of the generous tax breaks.
How do tax breaks work with charitable gifts in your will?
Every individual has a tax-free allowance of £325,000, known as the nil-rate band when looking at the value of your estate at death.
You also receive a further nil-rate band of £175,000 if a property is passed to your children or grandchildren. Better still, any assets in your estate passing to a spouse are 100% tax-free.
All other assets are subject to a 40% IHT charge after the nil-rate band is fully utilised.
Unless left to a charity.
Not only is leaving money to charity an act of altruism, gifts and donations to qualifying charities are exempt from IHT provided the gift has no strings attached and passes directly to the charity.
As well as the tax exemption, if 10% or more of your net estate is left to charity the tax rate on the rest of the estate is reduced from 40% to 36%.
This means that there would be no IHT bill for anything left to charity over the available nil-rate bands – or the IHT bill could be significantly reduced if a certain amount is given to charity.
Depending on the size of the estate, the reduced rate of IHT can save thousands.
An example of tax efficient charitable giving
At the time of his death, Vince’s estate is worth £500,000 after all tax reliefs are taken into account.
Vince donates £50,000 to charity in his will, 10% of his net estate, so the IHT due on Vince’s remaining estate is taxed at 36% versus the standard 40%.
The £50,000 charitable donation itself is not subject to IHT either, so the full £50,000 is passed to his chosen charity as he had planned.
The total IHT bill due on Vince’s remaining net estate is £162,000 (£450,000 x 36%).
If Vince had not left a charitable donation in his will, his estate would have an IHT tax bill of £200,000 which translates to a £38,000 increase in Vince’s net estate left to his loved ones versus the taxman.
The charitable donation therefore actually only cost the estate £12,000.
Both Vince’s charity and his loved ones benefit from Vince’s charitable giving by Vince leaving a 10% donation to charity in his will.
But what if you gift to charity that falls short of the required 10% threshold?
There is still an opportunity to do some IHT planning if this is the case.
In Vince’s case, his beneficiaries, or loved ones who enjoy his estate after his death, could employ a deed of variation.
This means that the beneficiaries could redirect their own inheritance to increase the amount of the gift to the charity to make up the shortfall to enjoy the reduced IHT rate of 36%.
It may be that only a small increase in the charitable donation is needed for the estate to be eligible for the reduced rate, with the resulting tax repayment more than offsetting the additional donation.
Again, it is a win-win for both the beneficiaries and the charity – with less money going to HMRC.
Can I donate to charity now to manage my IHT planning?
The choice of giving to charity in life or on death depends on personal circumstances.
Lifetime giving benefits from Gift Aid and has the added advantage of reducing the value of your estate for IHT purposes. However, leaving charitable gifts in your will could provide the comfort that you are helping a good cause whilst having sufficient funds to enjoy retirement.
IHT Tax Planning - Mirandus can help
The chancellor has recently frozen the IHT nil-rate bands until April 2026 and asset values are on the rise, such as people’s homes, which means more people may get caught in the IHT net.
The generous IHT breaks on offer for charitable giving should not be overlooked when drafting wills and planning for the future.
