Gifts to Charity in your Will

Why leave a gift to Charity in your Will?

Your legacy can make a real difference to your chosen charity.

Gifts to charity can also reduce the Inheritance Tax (IHT) paid on your estate.

How to leave a Legacy to Charity

Normally gifts to charity in your Will are made in one of the following ways:

• You can leave a specific sum of money or an item such as jewellery or a piece of art;
• You can leave a share in, or all of, what’s left of the value of your estate after all bills have been paid and all other legacies have been distributed.  This type of bequest means that no matter how much your financial circumstances change, the proportion of your estate you want to go to charity will stay the same.
• You can name a charity as the “reversionary” beneficiary.  For example you may name your family as beneficiaries in your Will but if they pass away before you, their share goes to charity

If you would like to add a gift to charity to an existing Will, you can use a codicil. Adding a codicil to your Will means there is no need to change the terms of your current Will; it simply adds a new instruction. As a rule, if the change you wish to make is small or simple, you can use a codicil; if the change is more significant or complex you should make a new Will.

What is Inheritance Tax?

Inheritance Tax is paid on an estate when somebody dies. It is also sometimes payable on trusts or gifts made during a person’s lifetime. Estates don’t have to pay Inheritance Tax if they are valued at less than the nil rate band threshold (£325,000 in 2015-2016).

Tax is payable at 40 per cent on the amount over this threshold, or 36 per cent if the estate qualifies for a reduced rate as a result of a charitable donation.

Charity Exemption

Any gifts you make to a charity recognised by HMRC (during your lifetime or in your Will ) will be exempt from Inheritance Tax.

For example:

Peter’s estate after deducting funeral expenses, legal costs and other liabilities is £500,000

Peter was not married and at death his IHT exemption is £325,000

If he leaves everything to relatives the IHT bill is calculated as follows:

IHT at 36% with gifts to charity

IHT is paid at the reduced rate of 36% when you leave more than 10% of your estate to charity.

In order to qualify for the reduced rate you must leave at least 10 per cent of the “net value” of your estate to charity.

“Net value” means the total of all the assets after deducting any debts, liabilities, reliefs, exemptions and the nil-rate band of £325,000.

The actual gift to charity is free of IHT but in addition there may be a tax break for the beneficiaries of the rest of your estate. If you leave at least 10% of your net estate to charity, the IHT on the non-charitable gifts could be paid at a reduced rate of 36% instead of the normal 40%.

For example:

Michael died on 1st January 2014 leaving an estate of £750,000 after deduction of liabilities. He leaves £50,000 to charity in his Will.

Step 1 – deduct the £50,000 charity donation from £750,000.  This leaves a figure of £700,000.

Step 2 – deduct £325,000 (IHT nil rate band) from £700,000. This leaves a figure of £375,000.

Step 3 – add £50,000 (the value of the charity donation) back to £375,000. This gives a figure of £425,000 – the ‘baseline amount’.

10 per cent of the estate of £425,000 is £42,500. This estate qualifies for the reduced rate of Inheritance Tax because the charitable donation of £50,000 is more than 10 per cent of the ‘baseline amount’.

The Inheritance Tax payable will be £135,000 compared to £150,000 if Inheritance Tax was paid at the full rate.

The gift to charity of £50,000 is free of IHT.

Warning – the rules are complicated so you will need to take legal advice and ensure the Will is very precisely worded. Purely Probate can advise you on this.

18/03/2014