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There are two good reasons to think about leaving money to charity in your will.
The first is that your legacy can provide valuable support to causes that are close to your heart – with many charities now heavily reliant on this type of donation.
The second – and, potentially, surprising reason – is that legacy gifts to charity can be incredibly tax-effective and form a useful part of your estate planning.
However, if you’re considering leaving part, or even all your estate to your favourite cause, it’s vital you spend some time working out what impact the donation will have and how it will affect any Inheritance Tax (IHT) that needs to be paid.
It’s also essential you leave your instructions in a properly drafted and up-to-date will and, if your decision means close family will get a smaller inheritance, discuss it with them to avoid problems further down the line.
And, of course, when it comes to IHT and estate planning, getting the guidance of an independent, regulated professional can be a very good idea if dealing with larger sums of money or you’re unsure over how to plan effectively.
Thousands of people include charitable donations in their wills, and the sums left to charity have never been higher. Recent figures show that, in the 2022/23 financial year, 140,000 charitable bequests were made, worth a total of £4 billion.
“Many people want to recognise charities that have supported them or their loved ones in their lifetimes,” says Jenny Ray, Partner at law firm DMH Stallard, specialising in contentious probate, wills, trusts and estate disputes.
“They may also want to leave a lasting legacy that reflects their values and beliefs.”
Alex Sealy, Partner and Head of the Wills, Trusts & Probate Team at law firm Slater Heelis, adds: “As well as making a positive difference to these causes, in some circumstances such gifts can also reduce the amount of Inheritance Tax payable, and can benefit both charities and other non-charitable beneficiaries when used in the right way.”
Under current rules, each person has an allowance of £325,000 before IHT is payable – this is known as the nil-rate band.
Any part of an estate above this threshold could be taxed at 40%, although it’s important to note that any assets passed onto your spouse or civil partner are currently exempt from IHT.
However, gifts to a qualifying charity currently do not incur Inheritance Tax.
Steve Hughes, Director and Chartered Financial planner at Five Wealth, says: “A gift to a charity can reduce the taxable value of your estate, thereby cutting the total amount of Inheritance Tax payable.
“Very simplistically, a gift to a charity after death of £100,000 can result in your Inheritance Tax being reduced by £40,000.”
In addition, if you leave at least 10% of the ‘baseline amount’ of your estate to charity – the taxable amount above the nil-rate band – the rate of IHT will be reduced to 36%.
You can use the Government’s IHT reduced rate calculator to see what impact charitable giving might have on your plans for passing on wealth.
If you give enough money to charity to qualify for the lower rate of IHT (36%), all your beneficiaries could actually receive more – or see more money go to charity at no cost to themselves – although this firmly depends on the amount bequeathed.
Sealy suggests taking the example of someone whose estate at the time of death is worth £750,000.
Deducting the nil-rate band of £325,000, as well as hypothetical debts worth £20,000, would leave a net estate – known as the baseline amount – of £405,000.
“Say the person bequeaths £50,000 to charity and the rest to a friend,” he continues. “This means the reduced 36% rate of Inheritance Tax applies because the gift represents more than 10% of the baseline amount.”
As a result, there's an Inheritance Tax bill of £127,800, leaving the beneficiary with £552,200.
Estate: £750,000
Debts: £20,000
Charitable donation: £50,000
Inheritance Tax (applied to £355,000 at 36%): £127,800
Beneficiary receives: £552,200
If the charitable donation was only £40,000, the estate would not qualify for the reduced 36% rate, and this would result in both the charity and beneficiary receiving less money.
Estate: £750,000
Debts: £20,000
Charitable donation: £40,000
Inheritance Tax (applied to £365,000 at 40%): £146,000
Beneficiary receives: £544,400
Note: These are hypothetical examples and you should consider consulting a regulated expert when considering charitable giving and IHT planning for your own circumstances.
There are also, at the time of writing, potential benefits in terms of Capital Gains Tax (CGT), says Ray.
“Where an asset in an estate increases in value between the date of death and the sale of that asset, there may be a CGT liability,” she says.
“But charities are [currently] exempt from CGT, so [giving] an asset to charity before sale can reduce the tax liability of the whole estate.”
Many people will already have a charity that’s close to their hearts. However, if you aren’t sure who to donate to, you’ll need to give your choice some careful thought.
“Our rationale for selecting charities is hugely subjective,” says Hughes. “As a starting point, find a cause that aligns closely with your values or helps to solve a problem you care deeply about.
“It’s also useful to decide whether you want to support bigger, national charities or smaller, local organisations.”
Ray adds: “It’s also recommended that you check the records of the charity on the Charity Commission website, as some charities may have changed their name or amalgamated with another charity.
“The database also includes filing records enabling you to check the financial health of the charity and any issues flagged relating to late filing of accounts.”
Sealy says that online searches can help you find any adverse media coverage of the charity in question.
“You can also speak with the legacy officer or treasurer at the organisation. Bear in mind that if the charity is not registered in the UK, there can be tax implications.”
Leaving significant sums to charity can sometimes cause upset within a family, especially if it comes as a surprise or somebody feels that they’ve been ‘short changed’.
However, if you’re worried, you can often avoid problems by discussing your plans and explaining your decision to anyone who might be expecting to inherit.
“Being open and transparent early is a good approach,” says Hughes. “The times we’ve seen difficulties is when there has been an expectation and then a change or surprise – at least in the eyes of the beneficiaries.
“Managing those expectations early helps. Many retirees have already given generously to their children, so wanting to create a wider legacy and impact with the wealth they’ve generated over a lifetime is not unreasonable.
“It’s better to be up front about this, explain the rationale to beneficiaries and field questions during your lifetime than have them find out after you’ve gone while grieving and emotionally charged.”
Putting a will in place is advisable even for the simplest of estates, but if you’re planning to leave money to charity, a clear will is vital.
Hughes adds: “Cases of contentious probate – disputes around the validity of wills or distribution of assets – are clearly on the rise.
“In your will, you must make reasonable financial provision for any financial dependant. This could mean that beneficiaries could potentially challenge a gift to charity, if the donation meant the beneficiaries would not get the financial support they would otherwise be entitled to.
“However, if those beneficiaries are already financially independent and not reliant on the deceased for financial support, it would be hard for them to challenge a gift to a charity.”
Ray adds: “Discussing the matter in advance and leaving a letter explaining your decisions can also often reduce the risk of a challenge being made.”
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