Charitable giving and inheritance tax (IHT) are two topics which you may not expect to see side by side.
Did you know that if your estate is likely to be liable to IHT and you leave it all to a registered charity or charities in your will, there is no IHT to pay? So, if there is nobody specific you wish to leave your estate to, you can both contribute to charity and legitimately pay no IHT.
Ways to reduce inheritance tax
If you do have relatives or friends who you would like to leave your estate to, if you also leave a proportion of your estate to charity in your will, this can reduce the IHT rate that is payable on the rest of your estate.
The benefits are clear – you either avoid IHT being payable on your estate entirely if you leave it all to charity or get a reduced rate of IHT if you leave part of it to charity AND you help good causes. We understand both are attractive to our clients!
IHT at 40% is payable on anything above your Nil Rate Band (NRB) – the amount of your estate that is not liable to IHT when you die. To benefit from the reduced IHT rate (36%), you need to give at least 10% of your net estate to charity.
For instance:
| Estate of: | Mrs Smith |
| Total value of assets | £1,000,000 |
| Liabilities | £10,000 |
| Individual NRB | £325,000 |
The liabilities and the NRB are deducted from the total value of the assets to produce the net estate:
| Estate of: | Mrs Smith |
| £1,000,000 - £10,000 - £325,000 = | £665,000 |
To benefit from the reduced IHT rate, Mrs Smith would need to leave a minimum of £66,500 to charity in her will. The charitable gift is deducted from the amount liable to IHT, as it is not taxable.
In the next senario you can see how much IHT she would pay if she did leave 10% to charity and the difference if she did not:
| Estate of: | Mrs Smith |
| £665,000 - £66,500 = £598,500 (36% IHT rate) | £215,460 payable in IHT |
| £665,000 (40% IHT rate) | £266,000 payable in IHT |
| Difference | £50,540 |
Note that this does not consider other tax reliefs or transferrable NRBs from deceased spouses and residential NRBs (applicable where you are leaving the family home to your descendants).
However, it demonstrates how you can avoid or reduce your IHT liability if you give to charity in your will. If you would like to discuss how this could benefit you and for other IHT advice, please contact us on 0113 320 5000 or you can email wills@winstonsolicitors.co.uk
